Insulet Corp

NASDAQ:PODD

Earnings Call Transcript 2017-Q4

[Operator]

Good afternoon, ladies and gentlemen, and welcome to the Insulet Corporation Fourth Quarter and Full Year of 2017 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.

[Deborah Gordon, IR]

Thank you, Brian. Good afternoon and thank you for joining us for our fourth quarter 2017 earnings call. Joining me today are Patrick Sullivan, Chairman and Chief Executive Officer; Shacey Petrovic, President and Chief Operating Officer; and Michael Levitz, Senior Vice President and Chief Financial Officer. The replay of this call will be archived on our website, and our press release discussing our fourth quarter 2017 results and first quarter and full-year 2018 guidance is also available in the IR section of our website.

Before we begin, I would like to inform you that certain statements made by Insulet during the course of this call may be forward-looking and involve known and unknown risks and uncertainties that may cause actual results to be materially different from any future results implied by such statements. Such factors include those referenced in our Safe Harbor statement, in our fourth quarter earnings release, and in the company's filings with the SEC.

Also unless otherwise stated, all financial commentary regarding dollar and percentage changes will be on a year-over-year basis.

With that, I will turn the call over to Pat.

[Patrick Sullivan, Chairman and CEO]

Thank you, Deb and good afternoon, everyone and welcome to Insulet’s fourth quarter and 2017 conference call. I’ll start off the call with an overview of the business highlights and financial performance for Q4 and full year 2017. Mike will follow with details on our Q4 and 2017 financial results as well as provide 2018 guidance. Shacey will then provide details of our commercial initiatives and an update on our R&D progress. We’ll then open up the call for questions.

2017 was simply a spectacular year for the company and a year of significant accomplishments. Number one on my list was gaining CMS Medicare Part D coverage guidance for the Omnipod system. Number two, we submitted DASH, our next generation product platform to the FDA. We're implementing our plan to go direct in Europe and we broke ground on our US manufacturing plant in Acton, Massachusetts and we delivered a very strong Q4 and 2017 results, including growth of over 30% in our worldwide customer base.

The first four are not only our accomplishments for 2017, but importantly our priorities for this year to fuel our growth in 2019 and into the future, namely securing Omnipod Medicare coverage with Part D sponsors, launching the DASH product platform, transitioning our European business through direct distribution and implementing our US manufacturing strategy.

I'll start off with the great news on CMS coverage for the Omnipod. On January the 5, CMS issued guidance clarifying that Medicare Part D sponsors are now permitted to provide coverage for products such as the Omnipod under the Part D Prescription Drug program. The 450,000 individuals were Type 1 diabetes in the United States, roughly a third of the market who have Medicare or Medicaid coverage will now have a pathway to access the Omnipod. Our users who are in Medicare and those that age into Medicare will now have the opportunity to continue to use Omnipod. They will no longer be faced with paying out of pocket for their life sustaining Omnipod or transitioning to a less attractive alternative. Achieving Medicare coverage is a monumental accomplishment and a tremendous benefit to our Omnipod Medicare beneficiaries.

Medicare Part D through the pharmacy channel is a clear differentiator and a competitive advantage for Insulet. The pharmacy channel will provide easier access to Omnipod since it’s simpler for physicians to prescribe in this channel. And it will also provide our users with a better patient experience, since they will be able to access the Omnipod in the same channel as they do their prescription drugs.

Securing Medicare Part D coverage provides us with a direct pathway to secure Medicaid state coverage since most of the Medicaid plans follow the CMS prescription drug coverage guidance. For those individuals on Medicaid, particularly the pediatric population, Omnipod will finally become a choice. We expect the benefits of Medicare coverage to begin in 2019 and during this year our market access team will focus on placing Omnipod on the formulary of the Part D sponsors.

In the meantime, our customer service team will work with our current Medicare customers to gain access this year to the Part D exception process. Achieving Medicare Part D coverage is a huge win for Omnipod patients, physicians and the diabetes community.

Next an update on DASH. Last month, we submitted a 510(k) to the FDA for the Omnipod DASH system, our next generation mobile platform. We are very excited about the significant potential of this state-of-the-art innovation and what it means for Insulet and our customers. DASH is the mobile platform for all of our innovation pipeline, including U-200 and U-500 programs with Lilly and our Horizon Automated Glucose Control System. The launch of DASH is of course dependent upon FDA clearance, which we expect in the second half of this year.

Now turning to the transitioning of our European business, we're on track with our transition to direct distribution of our Omnipod system in Europe on July the 1. I am thrilled with our European team’s exceptional execution. I'm also impressed with the level of experience and market knowledge of the team we're building on the ground in Europe. Last week, I attended the Advanced Technologies and Treatment of Diabetes or the ATTD meeting in Vienna, Austria, where we exhibited for the very first time as Insulet in Europe.

We had an incredibly busy and successful several days at the event, including a large number of visitors at our booth in the exhibition hall and many meetings with healthcare providers, commercial partners and our European physician advisory board. We also conducted an Insulet symposium attended by 120 participants, focused on an innovation pipeline. The latest on Horizon and clinical progress, a data review of 40,000 patients and results of a real world Omnipod experience from researchers in Europe.

The International customer base at the end of last year was estimated at nearly 65,000 with a vast majority in Europe and we expect the international customer base to continue to grow this year. While we truly appreciate the level of work required to ensure the continuity of care and to deliver the best possible customer experience as we transition to direct distribution in Europe, our team has the skills and talent necessary to transition this business successfully and I'm looking forward to direct distribution on July the 1. This transition is a huge opportunity for our European customers and significantly improves our financial profile in the second half of this year, as Mike will describe shortly.

Now, turning to manufacturing. We have made significant improvements across our manufacturing and supply chain operations and continue to drive increased daily production volume with less headcount and scrap, while delivering superior quality and reliable products. This sustained outstanding production performance continues to drive sizable improvements in our gross margin and we have a very clear line of sight to 70% margins for the business in 2021.

We're on track to begin production in our new state of the art manufacturing facility in Massachusetts in 2019, which will also serve as a site of our new global headquarters. We will build out the facility and install the automation equipment later this year and expect to start production in early 2019. The new facility will provide increased capacity and second source redundancy to support our significant growth trajectory. Operational excellence is at the core of who we are and what we do and it's a key success factor for this business.

Finally, let's turn to our financial results, which evidenced our outstanding performance and strong momentum. We exceeded guidance and delivered strong performance across our business in 2017 with revenue or $464 million, a growth of 26% year-over-year and $6 million above the midpoint of our most recent guidance range. US Omnipod revenue was more than $271 million, growing 18%. International Omnipod was $120 million, growing 67% and drug delivery was 72 million, growing 11%.

Our full year gross margin was 60%, an improvement of more than 200 basis points from last year. The year 2017 was a year of significant accomplishments and performance. During the year, we laid the foundation for further growth and profitability. As a result of the positive momentum we built in 2017, this year is shaping up to be another very exciting year for the company. We are very confident in our 2021 targets of $1 billion in revenue, 70% gross margin and above market profitability.

The future beyond 2021 is rich with significant opportunities for growth through our innovation pipeline and further geographic expansion. We are focusing on delivering innovation to our customers worldwide and superior returns for our shareholders. I'm proud of the team's execution and exceptional performance in 2017, their focus on our 2018 priorities and excited about the extraordinary bright future ahead of us.

And with that, I’ll turn the call over to Mike. Michael?

[Michael Levitz, SVP and CFO]

Thank you, Pat. I echo Pat’s excitement about the incredible year we had in 2017 and the strong positive indicators we're already seeing for 2018. I will now walk you through our fourth quarter results and then discuss first quarter and full year 2018 guidance. We're very pleased to report fourth quarter year-over-year revenue growth of 26% with revenue of $130.5 million. We exceeded the midpoint of our stated guidance by $6 million with two-thirds of the beat coming from US Omnipod due to our growing customer base and the remainder of the beat coming from international Omnipod due to momentum across our markets, including continued strength in France.

Our gross margin increased 210 basis points to 60.9%. This significant growth is primarily from the improvements we've made in our manufacturing and supply chain operations that Pat just outlined, offset in part by unfavorable mix due to faster growing international distributor sales. In just the last few years, as a result of the team's incredible execution and discipline to drive improvements in both quality and efficiency, we have seen growth from a mid-40% gross margin range to over 60% and growing.

We are targeting gross margin approaching 70% in 2021 and we expect to make considerable headway toward that goal this year, even before lower cost US manufacturing begins next year. Our operating expenses increased to $80 million compared to 65 million, in line with expectation and the net result was a small operating loss in the fourth quarter and it positions us well for achieving our 2018 objectives.

We ended the year with more than $565 million in cash and investments on our balance sheet, up from 300 million at the end of 2016. In November, we issued over $400 million in convertible notes and we subsequently used the proceeds to repurchase existing higher coupon notes with net proceeds of over $290 million. During 2017, we generated over $40 million in cash from operations, a significant improvement from prior years.

We've spent 77 million on capital expenditures to support the growth of our business, most notably for our investment in US manufacturing and supply chain operations. We expect our capital expenditures in 2018 to increase from 2017 as we complete development of our new US operations which as Pat said, is on schedule to begin pod production in early 2019. We're very pleased with our strong financial position as we make valuable strategic investments in support of our organic growth opportunities.

I will now walk you through our 2018 outlook. For the full year, we expect total revenue in the range of $560 million to $580 million, representing growth of 21% to 25%. First, we expect US Omnipod revenue in the range of $316 million to $323 million, representing growth of 16% to 19%. This primarily reflects continued strong growth in our US customer base, which Shacey will describe shortly. In 2018, we expect international Omnipod revenue in the range of $185 million to $194 million, representing growth of 54% to 62%. This exceptional growth will be driven by three factors.

First, capturing more of the value of existing end user pricing in Europe, up approximately 50% from our historic distributor pricing after we assumed direct operations July 1. Second, the full year impact of the significant increase in Omnipod adoption in 2017. And third, continued growth in our customer base in existing markets even as our top priority in 2018 will be customer continuity through the transition to direct operations. For drug delivery, we expect revenue in the range of $59 million to $63 million, representing a decline of 13% to 18%. This decrease reflects the current forecast from Amgen.

Now, for the first quarter of 2018, we expect total revenue in the range of $119 million to $123 million, representing growth of 17% to 21%. At a product line level, we expect US Omnipod in the range of $68.5 million to $70 million, representing growth of 15% to 17%. We expect international Omnipod in the range of $36.5 million to $38 million, representing growth of 45% to 51%. And we expect drug delivery in the range of $14 million to $15 million, representing a decline of 2 million to 3 million.

Please note that our guidance reflects the adoption of new revenue related accounting standards effective for 2018, which are presented prospectively in our P&L. We do not expect this to have a material impact on our financial trends. Specifically, the adoption of these rules increased our guidance for full year 2018 revenue by less than 1% or approximately $5 million, including $2 million of non-recurring international revenue spread evenly over the first half of 2018 and $3 million in drug delivery spread throughout the year.

For the first quarter, the adoption of these rules increased guidance by approximately $2 million, split evenly between international and drug delivery. Now moving to gross margin, following our gross margin expansion of 230 basis points in 2017, we expect full year 2018 gross margin will again increase significantly, up over 300 basis points to 63% to 64%, driven by continued operational improvements and the partial year impact of assuming direct European operations July 1.

As we stated previously, we expect an annual run rate margin increase of approximately 400 basis points beginning July 1. As such, we expect our consolidated gross margin in the first half of the year to be 60% to 61% and increasing to 64% to 65% in the second half of 2018. To achieve our revenue growth and profitability goals, we will continue to invest in our business, including incremental investments in 2018 to establish both direct operations in Europe mid-year and in-house manufacturing in the United States for production to begin in early 2019. We expect full year 2018 operating expenses to increase up to 25%, but to remain relatively consistent as a percentage of revenue even with the cost to establish our new European infrastructure.

Outside of the investments in Europe and US manufacturing, the increase in operating expenses includes continued investment in our exciting innovation pipeline as well as expansion of our commercial teams to meet the growing demand that we're seeing and take advantage of CMS’s decision that Omnipod is coverable under the Part D drug benefit. Please note that our expenses in 2018 will also be impacted by the adoption of the new accounting standards, requiring capitalization of sales commissions to be amortized over the period of benefit. The adoption of these rules will reduce our expenses in 2018 by approximately 1% to $4 million.

As previously stated, we expect the transition to direct European operations will require ongoing run rate European expenses of $45 million to $50 million, which are included in the stated 2018 guidance. We also expect certain non-recurring costs associated with this transition, including $7 million to $8 million primarily in the first half of 2018 as we establish our operations. In addition, we’ll pay a terminations fee to our European distributor based on our contract with them. While the amount will be determined over the year after we assumed direct operations and it could vary significantly based on the terms of the agreement, we do not expect the fee to have a material impact on our financial trends as it will be amortized on our P&L over the multi-year period of benefit.

Finally, we expect to make the pivot to operating profit this year with full 2018 operating margins in the low single digit percentage range. This reflects European infrastructure investments beginning at the start of the year before direct European revenues begin July 1. As such, we expect operating margin in the first half to increase sequentially over 400 basis points in the second half of 2018.

In summary, 2017 was a tremendous year of growth and development for Insulet and 2018 looks to be our most exciting and fulfilling yet, where we deliver strong growth at the top line, further expansion in gross margins and positive operating income for the first time in the company's history even with the investments in Europe and US manufacturing that will accelerate earnings growth in 2019 and beyond and we're just getting started.

I will now turn the call over to Shacey.

[Shacey Petrovic, President and COO]

Thanks, Mike. I share the enthusiasm about our team’s accomplishments in 2017 and we are off to a terrific start in 2018. Building on what Pat and Mike have shared with you, I will cover our growing global customer base, including where we ended 2017 and where we expect the strong momentum to take us in 2018. And then I'll discuss our strategic imperatives for the year ahead.

Our commercial strategies are clearly driving tremendous revenue and customer base growth. As a reminder, because of Omnipod’s recurring revenue model, the customer base growth is the best predictor of revenue growth. Our global customer base total is an estimate, because half of our US base and the majority of our international base go through third-party distributors. We ended 2017 with an estimated global customer base between 140,000 and 145,000 active users, which represents a year-over-year increase of over 30% and drove our strong company revenue growth.

We grew our US customer base by approximately 17% and our international base by approximately 60%. By the end of 2017, our customer mix approximated 55% in the US and 45% in international markets. Given this great momentum and how well positioned our commercial team is to capitalize on our strength in the market, we will drive robust growth again in 2018. We expect our US customer base will grow approximately 15% to 18% this year. In the US, our investments in increasing the footprint of our field team, raising awareness and driving broader market access, supported by strong commercial execution are paying off and will continue to deliver growth.

As you know, this year in Europe, our mission is to successfully transition our business and ensure continuity of care and world class support for our existing customers. There is an incredible opportunity in Europe to grow our customer base over the medium and long term, but this year's success will be driven by our change to a direct business model, which significantly benefits our revenue and gross margin in the second half of this year.

Naturally, there will be a period of transition and adjustment, but overall we expect to grow our international customer base approximately 20% to 25%, which coupled with our strong US growth will drive global customer base growth of approximately 20%. In 2018, our commercial teams will focus on three key strategic initiatives. One is to secure widespread Medicare pharmacy coverage for Omnipod, starting in 2019 and to expand Omnipod coverage through the pharmacy channel with Medicaid and existing commercial payers. Two is to continue our development work focused on a clearly differentiated, rich and innovative product pipeline, including this year's launch of our new Omnipod DASH mobile platform. Three is to stand up our European operations and successfully transition this business.

Starting with Medicare, as Pat noted, gaining Medicare coverage of our Omnipod system is a big win. It's a win for our customers, a win for the physicians who treat them and it's a win for the diabetes community who may now access innovative technology and choose the device that best suits their needs. Coverage through the pharmacy channel provides our users an improved overall experience with broader and easier access through our pharmacy benefits.

A growing portion of our business is already through the pharmacy channel where our customers are getting their insulin and their diabetes supplies. We hear from clinics and patients that this provides for more efficient, less burdensome access. This is also true for our company. In the pharmacy channel, there are typically less hurdles to receive pods, the turnaround time for new customers is typically a fraction of the time through traditional DME and patients are no longer subject to the challenges of large deductibles.

The pharmacy channel is a great option for a growing percentage of our commercially covered users and has the potential to offer our Medicare beneficiaries similar advantages. Between now and Q3 when most of the Medicare Part D plan sponsors establish their reimbursement and coverage policies for 2019, we will work to secure access, so Omnipod is included in their formulary benefits at the start of next year.

We also have the benefit of negotiating with a relatively small number of planned sponsors as the top three represent approximately 60% of Medicare Part D covered life and the top eight cover approximately 80%. We are currently in discussions with all of these planned sponsors. At the same time, CMS’s Medicare guidance should help accelerate widespread state Medicaid access and we are in the process of establishing coverage with these plans. Omnipod’s low upfront cost and differentiated form factor provide a strong value proposition and we are confident we will secure broad access for Omnipod on Medicare Part D and Medicaid plans for 2019.

Next, our innovation efforts. We achieved another significant milestone last month with the filing of our 510(k) for FDA clearance of Omnipod DASH. At the core of this innovative technology is our drive for simplicity and ease of use. And what is so important and so unique about DASH is that it provides benefits across all stakeholders, patients, clinicians and payers. We designed DASH through the eyes of our customers, with a keen focus on ease of use through mobile technology. DASH is unlike any other product in the market. With the addition of secure Bluetooth connectivity, DASH will provide mobile phone display for our users and mobile apps for their caregivers in addition to data and insights for patients, physicians and payers.

For patients, this means incredibly easy and well controlled informed delivery with their pod now controlled by a new modern touchscreen PDM. Their data will also be accessible via our Omnipod display apps on their smartphone and they will have the added benefit of sharing their data with caregivers through our Omnipod View app. For clinicians, DASH means easier patient on boarding, including less training time and immediate access to patients’ diabetes data.

And payers will have the ability to access detailed data on their specific membership populations through our Omnipod DASH boards. Payers can drill down into outcomes data by patient demographics, geography and behaviors to better understand Omnipod’s link to improved outcomes. We’ll work with the FDA as they progress through their review of DASH and look forward to a limited market launch later this year. Our DASH platform is the foundation for future innovation, including our development programs for Omnipod U-200 and U-500 concentrated insulin and our Omnipod Horizon Automated Glucose Control System.

We are making substantive progress with all of this development work and we're on track to introduce these products into the market over the next few years. We are eager to share our exciting development milestones with you as the year progresses. We're confident that we're on an innovation pathway that will continue to differentiate Omnipod in the market and that will provide our users, their physicians and payers with a world class experience with access to critical data insights and with demonstrated outcomes.

In our drug delivery product line, we were mainly excited about what an attractive opportunity this business represents over the long term as well as the recurring revenue stream it currently generates. Today, the product line primarily reflects sales to Amgen for their Neulasta Onpro kit. As Amgen recently noted, adoption exited the fourth quarter of 2017 at just over 60% of all US Neulasta doses sold. We continue to have active discussions and explore opportunities with pharmaceutical partners and based on their feedback believe our pod platform provides a truly unique product offering. Omnipod’s wearable, connected delivery platform has the potential to improve adherence and outcomes and we remain confident that other non-informed therapies will also incorporate our pod differentiated technology.

Now, turning to our international business and the exciting progress we've made expanding our European infrastructure to support a successful transition of our Omnipod customers on July 1. We are hitting all of our key milestones in a very thoughtful and very thorough strategic plan and we're benefiting from the considerable expertise of our new European management team. Our newly hired team includes commercial leaders throughout various European geographies within the areas of sales, market access, customer service and all other key support functions.

This team brings an incredible amount of diabetes experience and importantly a deep knowledge of European market dynamics. Thanks to this talented team and the support of the diabetes community, payers and business partners, we continue to gain deep insight into our key market leads and prepare for a seamless transition on day one. One of the key learnings we've had is that the vast majority of this business is served through intermediaries, which reduces the number of parties we have to contract with and mitigates transition risk.

So in addition to the concentration of our Omnipod business within Europe, 90% of the volume exists in five major markets. We also have this further concentration among these intermediaries within those markets. As we move through this transition, we are increasingly confident that our move to direct distribution will provide meaningful benefits to all of our key stakeholders and set us up to drive significant long term value.

As we grow, we continue to build the clinical evidence, supporting the strength of Omnipod through additional studies and within peer reviewed publications across the globe. We are thrilled to announce two clinical publications this month. The first is the German Austrian Registry Manuscript comparing adolescents who switched to Omnipod from multiple daily injections and it was published in Pediatric Diabetes, demonstrating that Omnipod was associated with improved glycemic control after one year.

Our second publication highlighted the results of the first IDE for our Omnipod Horizon and was published in the journal, Diabetes Technology and Therapeutic. Also just last week, at ATTD in Vienna, there were two presentations from our second Horizon IDE study, examining meal time challenges and exercise in adults with type 1 diabetes. These data further demonstrate that our algorithm continues to perform very well and additional studies are underway, examining longer system use in free living setting. At ATTD, we also presented real world data of Omnipod in use in the United States, Germany and the United Kingdom. We are building a strong body of clinical support and generating greater awareness of the benefits of our technology throughout the global diabetes community.

In closing, I am incredibly proud of our team's accomplishments. We continue to drive robust near term growth throughout our business, while executing on our strategic imperatives to strengthen our foundation for long term profitable growth. We are excited about our significant opportunities in 2018 and even more so for 2019 and beyond. We have created tremendous value for Insulet’s shareholders and improve the lives of more than 140,000 people living with diabetes and we're just getting started.

With that operator, let’s open the call for questions.

[Operator]

[Operator Instructions] And our first question will come from the line of Matt Taylor with Barclays.

[Matt Taylor, Barclays]

So the first question I wanted to ask you was, given the 17% growth that you estimated for the US customer base, you've got some good things going on here in 2018 and I know you're assuming no Medicare, but could you walk us through some of the assumptions that get you to the 15% to 18% to start out and where there might be some pluses and minuses versus last year.

[Shacey Petrovic, President and COO]

Sure. Matt, maybe, I'll start and Mike you can add what’s factored into the guidance. But essentially, that's coming from our investment in expansion of the sales force. So in the United States, we made an investment to increase our field footprint and the sales support staff by about 20% or 25%. And to that is certainly driving benefit. We continue to make strides in terms of market access. So while we believe that the vast majority of that impact will hit us in 2019 as we really unlock coverage and access in Medicare and Medicaid, it doesn't mean that we're not going to continue to drive improved access through the Medicaid channel in 2018.

And then finally, we continue to invest in awareness in the United States to continue to grow the education and around the benefits of Omnipod. So I’d say those three things are driving our growth in the United States.

[Michael Levitz, SVP and CFO]

And Matt, this is Mike. As it relates to the guidance, so just as a reminder, there is some seasonality in our business in the US Omnipod business. It generally surrounds the reset of deductibles and so what we’ve described is that installed base that as you mentioned, our customer base is a really -- it's probably the best indicator for the growth of the business, but that's definitely more true on a full-year basis than it might be in Q1 versus another quarter just because of those reset of deductibles. And so sometimes, people will purchase more in the fourth quarter before their deductible resets, have a slower Q1 and then they'll pick up in Q2. The guidance for Q1 is really not indicative of anything other than just that dynamic. As you can see what the guidance we gave for the year, it's very strong growth for the year and we really believe we have a tremendous amount of momentum.

[Matt Taylor, Barclays]

And just one follow-up, you mentioned the strength in France, which was a real strong area of growth for you in 2017. Can you talk about the trend there and whether you think you maybe topping up, help us understand how that is progressing, whether there is any other market specific dynamics internationally that we should think about aside from the transition?

[Shacey Petrovic, President and COO]

Sure. And so France continues to be a very strong performer for us. It now accounts for -- still accounts for about a third of our international business. And while the growth has started to temper, I would say, it was extraordinary for about a year and a half to two years and we're still seeing really nice growth out of the market. So we said all along, we were new into the market a couple of years ago. We said all along eventually, the test has sort of tempered down. I would say it’s still strong, but softening a little bit from where it was last year.

[Michael Levitz, SVP and CFO]

And Matt, just to clarify, this is Mike. It's exactly where we expected it would be. So this is all what we expected.

[Shacey Petrovic, President and COO]

And then, I think your other question Matt was just around other factors or contemplation in terms of the European transition, what we wanted to communicate is obviously we feel great about the team's preparation and execution in transitioning this business, but our focus in 2018 is really on customer continuity for our existing customers, which is why you see a little bit tempering of the installed base growth. So despite this transition, we fully expect that both Europe and our international market customer base will continue to grow in 2018, but a lot of the revenue growth is going to come from the pricing uptick in the second half as opposed to the installed base growth.

[Operator]

And our next question will come from the line of Jayson Bedford with Raymond James.

[Jayson Bedford, Raymond James]

So I guess just to start and I guess it's somewhat tied to the first question, the geographic mix of the user base was a bit different than I thought. The US was stronger than anticipated in the implied basis, higher than what we had. I'm wondering if you saw any benefit in the fourth quarter from some of the competitive disruption in the US market.

[Shacey Petrovic, President and COO]

We did see some benefit. I wouldn't say it was huge or outsized. So, we did have obviously pathways for people to access Omnipod with no upfront cost, if they were transitioning off of Animas and that accounted for maybe 10% to 15% max of our new patient starts. And then, just as a reminder, I know you know this, but in any given quarter, our new patient starts don't really drive a significant increase in revenue. So, it certainly added a little bit to our installed base growth, but it was a strong quarter across a number of fronts in the United States.

[Jayson Bedford, Raymond James]

I guess just as a related follow-up then, you exceeded the high end of your US range for the fourth quarter. What differed from your expectation three, four months ago?

[Michael Levitz, SVP and CFO]

This is Mike. A few things. One of the things I described in Matt’s question is just the dynamic of how people purchase their product. And what we saw is, we saw an increasing amount of reorders in the fourth quarter. Sometimes, people do that because again typically because they have maybe higher deductible plans or other things like that and their planned deductibles reset in the first quarter. So that was higher than what we expected. Our growth was higher than what we expected. We had been guiding to installed base growth of about 15% and as Shacey described, our customer base grew 17%. So, that -- we just are seeing tremendous excitement and momentum in terms of the growth of the business and that's what drove the outperformance.

[Shacey Petrovic, President and COO]

Yeah. And that's kind of why I'm reluctant to say it was sort of down to Animas, because in fact in Q4, we had more MDI new patients to Omnipod than in any preceding quarters. So, it was a really strong quarter from a new patient start standpoint, just independent of the programs that we have going.

[Operator]

And our next question will come from the line of David Lewis with Morgan Stanley.

[David Lewis, Morgan Stanley]

Just a couple of quick questions for me on some of these themes. Shacey, just thinking about international, if my math is right, your underlying guidance or underlying performance internationally is like 30% to 38%, sort of how you see the international growth rates and relative to the 60% you put up this year, can you just give us a greater sense of how you're thinking about that number for France and the trend there and then some of that disruption.

[Shacey Petrovic, President and COO]

Yeah, maybe I'll let Mike comment specifically on the numbers and I can certainly give some color in terms of what we're seeing in the market and how we feel about the opportunity set there.

[Michael Levitz, SVP and CFO]

Sure. So it relates to the specific revenue guidance, one of the things that we've been saying for quite some time now as we've been talking or it feels like quite some time, as we've been talking about this transition to direct is that our guidance contemplate that there will be some short-term disruption around the transition itself as any transition would be get some disruption and so we typically say that installed base is the best indicator of growth, however, in a transition like this, there's another element to it just related to volumes purchased that could happen when one party exits the market and we enter. And so we're just factoring in that that disruption could occur in a short term around the transition, that really doesn't relate to the installed base. The installed base growth continues to be robust and we're just factoring in that potential short term disruption into the actual guidance for ’18.

[Shacey Petrovic, President and COO]

But I did -- I think you're right in the ballpark if we sort of say France isn't going to continue to grow at the outsized rate that it had, you're probably right in the ballpark in terms of the growth of the market. That said, what's really exciting about this move is that once we make this transition, we're going to be able to sort of have a truly global footprint and move into new markets when and how we want and so, as we think about ’19 and beyond in terms of growth rates for Europe, we'll be looking at entrance to new markets and that we hope to obviously drive continued expansion of growth in that market.

[David Lewis, Morgan Stanley]

This is a much better number underlying than we expected, so I wanted to make sure you were being clear there and you were very clear. And then Shacey, the next question just in the US and I appreciate your commentary in the fourth quarter, but if you think about 2018 and pretty explicit Medicare is not sort of in the plan for 2018, is it really just -- is that realistic even in terms of how you think about the Medicaid business where you already have seen some traction and the same kind of question on Animas for 2018, is that really explicitly in your US forecast?

[Shacey Petrovic, President and COO]

Yeah. And David, both of those things are explicitly in our US forecast. The Animas and as well as the Medicaid continued expansion in terms of Medicaid. So we feel good about the growth that we're going to deliver despite the fact that a lot of these really exciting potential impacts like DASH and like Medicare and really big Medicaid expansion hit us in 2019. But despite that, 2018 is going to be a great year.

[Operator]

And our next question will come from the line of Mike Weinstein with JPMorgan.

[Unidentified Analyst]

This is Robbie in for Mike. So I'll give you a break in terms of the new patient adds and I wanted to ask about drug delivery, because I think you’d been consistently saying that you thought it could grow in 2018. So what are you thinking about the trajectory of that line item going forward? And is there any change in profitability as the sales trend off?

[Shacey Petrovic, President and COO]

Great. And so Robbie I don't think we ever said that we expected the business to grow in 2018. What we've always said is that, we base our guidance and our expectations on Amgen’s forecast in orders. So that’s kind of the end of it in terms of the Neulasta business, which is the vast majority of our drug delivery guidance, but I would say, I think it sort of points to just how successful the business is on the diabetes side, because despite this sort of slight headwind that we have with drug delivery, you see tremendous revenue growth and margin expansion in our diabetes business. It's really exciting to me to see that happen in 2018 and beyond.

[Michael Levitz, SVP and CFO]

And Robbie, this is Mike. Just as it relates to your question about what Shacey was referring to on the margin piece, so I mean, we are right on target even with the reduced Amgen forecast for gross margin expansion and even positive result in 2018 and I think it's just, we are internally just thrilled with the execution by the operations team and that helps across our business. And so, drug delivery is a much smaller part of our business and so to deliver the operational improvements that we are doing, it just really shows the strength of the overall business for many years to come.

[Unidentified Analyst]

And just a follow-up, as people think about Medicare and Medicaid and they start to add it to their models going forward, there won't be any revenues in 2018, but how do you want people to size the market or are there any metrics you can give us in terms of thinking about revenue per patient, is that something that should be similar to a commercial patient going forward?

[Patrick Sullivan, Chairman and CEO]

Yeah. As it relates to Medicare and Medicaid, I think typically we believe we’ll be similar to the DME rates that are out there for pharmacy Part D coverage, but when you think about the opportunities that there were 450,000 people that are in Medicare and Medicaid, we believe that with this coverage, we’ll be able to take our fair share of that patient population.

[Operator]

And our next question will come from the line of Margaret Kaczor with William Blair.

[Margaret Kaczor, William Blair]

First one from me is a follow-up on some of your commentary regarding those intermediary contracts in Europe. That seemed like it was maybe a higher percentage than what we expected when you referenced that, I think it was JPMorgan conference. What work have you guys done and are these intermediaries maybe secondary distributors that you could look to contract with and really smooth out the process come day one?

[Shacey Petrovic, President and COO]

Yeah. That's exactly right, Margaret. So that's exactly how we're thinking about it and it is higher than maybe we -- every day, we're learning more about this market and this transition and one of the key elements of the approach we've taken is to reduce complexity and mitigate risk in the transition and so that’s been sort of a rallying cry for the team. And part of the reason why there's a higher percentage of intermediaries is because as we've discovered those opportunities, we have jumped on them to make sure that we reduce complexity and mitigate risk in the transition.

So, the last time I think -- the last estimate we were talking about maybe 70% of the business going through intermediaries. Now, it's closer to 80%, 85%. And where we have the opportunity to do that, while also maintaining the flexibility for the long term, we will. So we certainly don't want to ham in our opportunities over the next 2, 3, 10 years in Europe, but where we feel like we can mitigate risk, reduce complexity and not disturb our opportunities long term, we will do that and this is just evidence of that.

[Michael Levitz, SVP and CFO]

And I would just add, we’re able to maintain the 50% increase in end user pricing even with these intermediaries in the various markets.

[Margaret Kaczor, William Blair]

And have you guys already approached some of these folks at this point where maybe they're ready or into transition, plus does it change your expense structure. Do you guys try to roll out international?

[Shacey Petrovic, President and COO]

I'll let Mike comment on the expense structure, but I will just say that we are in conversations with all of these intermediaries across every major market.

[Michael Levitz, SVP and CFO]

Yeah. And it does not change our, either the revenue guidance or the expense structure from what we've really been saying.

[Margaret Kaczor, William Blair]

And then just as a second question, different topic. You guys mentioned an exceptions process within Medicare that you guys are trying to pursue before you get on formulary. Have you seen any success stories yet at this point? Or how many of these patients are in guidance? And then in terms of patient attrition related to Medicare, is there any change in gotten on that plan?

[Shacey Petrovic, President and COO]

Yeah. So good questions and we are -- we have a team of people to support our Medicare beneficiary powders through the exception process. To date, we've gotten somewhere between 50 and 100 customers through the exception process, but just to caution, it's not really a revenue opportunity for us, because we're focused on the customers who today either pay cash out of their pocket or use some sort of secondary insurance and so those are the folks that we are getting through this exception process. So in general, they were probably paying more than we will get reimbursed through this process, however, it is absolutely the right thing to do for our patients and our potters and so we're excited to help support them through this process and we anticipate that we'll get a vast majority or a good portion of our Medicare beneficiary through this process.

[Operator]

And our next question will come from the line of Kyle Rose with Canaccord.

[Kyle Rose, Canaccord]

So I wanted to ask a question about on the Horizon project. I mean the IDE data we saw last week was definitely positive. I just wondered if you could remind us what the key milestones are for the next round of IDE trials and then eventually the pivotal trial as we think about the ’18 and eventually regulatory process in 2019.

[Shacey Petrovic, President and COO]

Sure. So our third IDE trial is still underway and so that puts us on track for the clinical plan that we mapped out with the FDA. We're learning a lot in this patient population. So as you remember, our goal was to launch with a product that did two things. One was indicated for kids and children because it's such a large component of our patient population and also was simple enough for people coming from multiple daily injections to be able to transition to it. So this IDE focuses on kids down to age two and we are learning a tremendous amount in this patient population.

We have kids down to age two in free living conditions and so as we make our way through this data, we're reviewing all of the clinical results and so that will really determine the rest of the clinical pathway before us. So no changes to guidance today. We’re kind of on track to what we originally outlined, but once we've completed this study and analysis, which will happen in the next month or two, I think we’ll determine if any other clinicals are required before we move into pre-pivotals. So everything goes well, we would be in pre-pivotals this year. If we want to add additional studies, it may push it out.

[Kyle Rose, Canaccord]

And then a similar question on the concentrated insulin side. I think you’ve historically given guidance on the, I think, it's U-200 coming to market at some point in 2019 and just as investors start thinking about their models in the out years, how you think about that opportunity, how we should kind of frame initial commercialization there would be very helpful?

[Shacey Petrovic, President and COO]

Sure. Yeah. We're really excited about these programs obviously. It's been a terrific partnership with Lilly and I think you know this Kyle, but it does double our addressable market and gets us into type 2 in a big way. But just to clarify, the first product that will come to market is U-500. So that's a smaller opportunity, but one of Lilly’s fastest growing molecules and because it's a really significant unmet need, so that will come to market in 2019 and then in 2020 will be in market with U-200, which is the much larger opportunity for us. That gets us access to the vast majority of people living with insulin dependent type 2 diabetes.

[Michael Levitz, SVP and CFO]

And this is Mike, just a clarification. So because of our recurring revenue model, it's not like when it comes to market, you get a big bolus of revenue. It really just continues to accelerate the growth or the growth curve for our revenue stream.

[Operator]

And our next question will come from the line of Doug Schenkel with Cowen.

[Ryan Blicker, Cowen]

This is Ryan for Doug. You’ve cited channel mix as a tailwind to the US Omnipod business over the past few quarters, but didn't talk about in your prepared remarks this quarter. Did this benefit you again in Q4 and can you talk about, if so, how material the benefit it was in 2017 and how you're thinking about 2018.

[Michael Levitz, SVP and CFO]

This is Mike. So, the mix continues to be favorable to us in the US from a pricing standpoint and that's definitely good. It's really not the main part of the story. As you can see by the growth in the installed base, that tracked pretty closely to the growth in revenues. So it is helpful and we expect that trend to continue, but the primary reason for the growth in our US business continues to be the growth in the installed base.

[Ryan Blicker, Cowen]

And then can you talk about your overall attrition levels today, maybe just provide a little more color, are they consistent with where you've seen historically? I know there are some error bars around that and then maybe provide more color on a question asked earlier about the Medicare process, do you believe that that can help you reduce your attrition in 2018 or is that not really a material impact until 2019.

[Michael Levitz, SVP and CFO]

This is Mike. I’ll take the attrition question and Shacey, if you want to take the rest. So just as a reminder, we moved to really focus our discussions on customer base, on installed base. I think it was a year or so or more ago and the contributors to the -- in the customer base are the additions for new patients obviously and the reduction of our attrition. One of the challenges that we have is that because of the amount of distributors that we sell through from a channel perspective, you don't have the best data on that side of the business.

So we rely on what we see on the direct business. And as people move between channels, it can look like attrition or not and it could just be moving between channels. So with those caveats aside, we expect that attrition is about the same. It really hasn’t -- it hasn't changed very much. The trend seems to be positive. We continue to make improvements in our product quality, which is one of the elements.

But one of the other biggest elements that drives attrition is access, the cost of the product to patients, meaning their market access and that's where this Medicare decision is so helpful for us because again Medicare and Medicaid are a third of the market that we have not until recently had a pathway to. So we expect that that will absolutely help attrition as we go forward and as we saw on the access side, it's really 2019 that Medicare and broader expansion of Medicaid really kick in.

[Shacey Petrovic, President and COO]

Yeah. I completely agree with everything that Mike just said. I think we won't see a material impact on attrition this year despite the fact that we've got this exception process, we are really focused on getting the people who are paying cash out of pocket through that exception process and so they haven't technically traded from the product. I do think as we make significant gains in 2019 with Medicare and Medicaid, that has a real potential to solve for some of the access issues that are driving attrition.

[Patrick Sullivan, Chairman and CEO]

And I would just add parenthetically that DASH gives us the opportunity to really hone in on understanding the attrition because we will know where our patients are with certainty.

[Operator]

And our next question will come from the line of Jeff Johnson with Baird.

[Jeff Johnson, Baird]

Mike, just maybe cleaning up one question from the fourth quarter. OpEx was up 35%, 36%; G&A, up 48%. Was there something one-time in there? I'm just trying to get that to jive with kind of your up 25% OpEx guidance for 2018.

[Michael Levitz, SVP and CFO]

Well, first of all, there weren't any significant one-time items. Specifically if there are significant ones, I’ll call them out. One of the things to keep in mind relative to our OpEx guidance is we're making a lot of investments for the European infrastructure. Some of that and for US manufacturing for that matter. And some of manned up in G&A as the majority of the European ones are for commercial as you would expect from sales and marketing. So there were incremental investments there and those -- there are some non-recurring expenses that we will see, relative to the European expansion. In my prepared remarks, I described $7 million to $8 million that will happen mostly in the first half of the year. That's factored into our OpEx guidance for next year for ‘18. But apart from that, I don't really expect there to be material non-recurring items.

[Jeff Johnson, Baird]

And then just for my second question, obviously some interesting IDE 2 data last week in Vienna, especially that I thought the 50% to basal delivery pre exercise, the improvement just saw there versus maybe taking that target range up to 150 ahead of exercise. There are so many cool things like that you guys seem like you can do with your algorithm. So I guess the question is, how do you balance the -- all these cool things you could do versus trying to make sure you get a product that you could submit for approval, somewhere in 2019, get approval by the end of 2019, early 2020 and Shacey, you kind of alluded to this in your answer to a question a few questions ago about all the different ways you could play with this and maybe do more studies before the pre-pivotals and all that. So just how do you balance the time to market versus the cool stuff?

[Shacey Petrovic, President and COO]

Yeah. It's a great question, Jeff and it’s honestly one that our team is wrestling with every day. I think you're right, we could -- I think we could drive incredible value here and do a lot of amazing things with this technology. We go back to our mantra, which is our products are all about simplicity and reduction of burden. So if we're adding features or functionality that don't achieve those things, we're not going to compromise time to market for that, however, we would compromise time to market for simplicity and ease of use and so that's really where we're focused on the user interface and making sure that we drive better outcome, but that we do that with a very simple, easiest to use product on the market and that's where a lot of the focus has been, including on our target patient populations.

So, we'll do what we've been doing all along, which is review the data in a very detailed fashion, understand the key strengths of the algorithm and then incorporate those as best we can in the first generation. I think we've also seen now from these technologies that you learn a lot once they get onto the market, so we're benefiting from others who are sort of hovering that ground before us and we do want to get to market as soon as we can, so that we can learn even more about our user experience as we get our product out there.

[Operator]

And our next question will come from the line of Raj Denhoy with Jefferies.

[Raj Denhoy, Jefferies]

Couple of questions. One on DASH, I know it's going to be a little limited launch when you do a launch later this year, assuming it gets approval, but how should we think about the revenue contribution from that? Will you be charging for the new PDM? Will there be an upgrade cycle for the patients that wanted, just how should we think about that from a modeling perspective?

[Shacey Petrovic, President and COO]

I think with any new product and this goes for DASH and every other product that's in our pipeline, I would look at this as an opportunity to accelerate pod volumes and growth in the installed base as opposed to revenue tied to the piece of capital equipment. It's just not our business model and so regardless of what we decide to do in terms of the commercial launch strategy, that piece will never drive a tremendous amount of revenue in a given quarter or a year.

[Michael Levitz, SVP and CFO]

And this is Mike. Just as it relates to the revenue guidance, so as we said, we've submitted the FDA, we will have a limited launch later this year and given our recurring revenue model, it really is more of a 2019 benefit from DASH.

[Raj Denhoy, Jefferies]

But just to be clear, I mean the 140,000 or so patients I guess I mean globally, will they have to buy a new PDM in order to get all the new functionality of DASH or is it something that they can trade their existing PDM for?

[Shacey Petrovic, President and COO]

They will have to acquire a DASH PDM in order to get all the benefits from DASH, but we're working on pathways for our customers to be able to access that.

[Michael Levitz, SVP and CFO]

And particularly, in light of the new Medicare Part D coverage exploring other launch opportunities.

[Raj Denhoy, Jefferies]

And then just one on Medicare, how do you think we should best think about that opportunity. Is the bigger opportunity for you to keep patients that would have otherwise aged into that population or is it -- do you think there's a fertile ground in those existing Medicare patients to actually get them on the Omnipod? What's the bigger opportunity for you?

[Patrick Sullivan, Chairman and CEO]

I think there's two opportunities as those patients who are currently in Medicare that are paying out of pocket to keep those patients. We found that attrition of those turning 65 is a lot higher than attrition in other parts of our customer base. And secondly it's for patients that are 55 and will be on the product for a long period of time. Physicians were reluctant to provide them the Omnipod, because they knew as they would age in the Medicare wouldn't be an opportunity for them. So I think it's in both. And then the spillover effect into Medicaid is tremendous. So, all 450,000 patients or a third of the market that we didn't have access to, we now have access to. That's the big opportunity.

[Operator]

And our next question will come from the line of J.P. McKim with Piper Jaffray.

[J.P. McKim, Piper Jaffray]

I had one on Medicare. I think you called out 8 of the plans gone through, have like 80% of the volumes. So on those 8 or so sponsors, are you guys already covered with them through the pharmacy for their commercial aids, I’m just trying to gauge the risk of them not covering?

[Shacey Petrovic, President and COO]

Yeah. It’s a good question. It's a little bit of a mix. So we do have coverage on the commercial side with some of those plan sponsors. We are in discussions with all of them and fully anticipate that we will be successful with a number of them. I couldn’t give you a specific guidance on that today, but I think just to understand the process, most of these plan sponsors, if not all of them are going to determine their coverage policies by October. So before probably Q3, we're going to be able to give you really good guidance on how successful we were accessing these Medicare beneficiary life and establishing Omnipod for them. So we'll certainly keep you posted, but we're in discussions with all of them today and we already have commercial coverage with some of them.

[J.P. McKim, Piper Jaffray]

And then one on gross margins, I mean I think you guided 63% to 64% for ’18. As you ramp to 70%, how should we think about kind of that mix coming from more direct here in the US at your new plan versus just overall volume growth? Is there a good way to frame that up?

[Michael Levitz, SVP and CFO]

This is Mike. So it really is interesting, the guidance that we gave for the full year, it's almost a tale of two halves for this year, because all of the first half is investment in to second half related to Europe and the second half is the benefit. So the run rate in the second half on gross margin improved by 400 basis points. So, what we're saying -- what I said in my prepared remarks is that we're going to be coming out of the second half in the 64%, 65% range. So as it relates to the target of 70, all of that is before US manufacturing. We definitely expect that the US manufacturing will drive down cost quite nicely. So it's not just about volumes.

When we laid out at our Investor Day the drivers of gross margin expansion, manufacturing improvements and supply chain improvements were the principal drivers and those still remain largely ahead of us. So, the 400 basis point improvement comes from going back in Europe and that's reflected in the 64% to 65% run rate in the second half of this year, but past the 70 is really driven by the combination of US manufacturing, continued manufacturing of supply chain improvements and then volume support on top. But we're making improvements in a number of areas, even as mundane as the ones we've talked about in the past, like freight that may seem small, but we really focus on the pennies and they really add up quickly.

[Operator]

And our next question will come from the line of Danielle Antalffy with Leerink Partners.

[Danielle Antalffy, Leerink Partners]

Shacey, just a question for you as we think about the TAM for Insulet, specifically in the diabetes portion of the business, leaving drug delivery aside, but we're hearing pretty positive commentary about what the artificial pancreas could do to pump penetration and you had also mentioned on a call that we hosted a little while back that the pediatric population has something, the type 1s have something or something like 50% to 60% penetrative for pumps versus 30% to 35% for the national average. So inherently, that would imply that that 30% to 35% number should move higher, albeit minus some attrition as those age. So I am just curious what your view is on the long-term potential pump market penetration in type 1s?

And then the second part of this question and how important the artificial pancreas is to get there? And then the second part of my question is for type 2. I was surprised to hear you say on that same call that 13% I think was the number of Omnipod patients are actually to type 2s. What that number could move to once we do have type 2 products on the market?

[Shacey Petrovic, President and COO]

I think both are really good ones. You're right. When we when about pump penetration today in the United States, somewhere between 30% and 35% of people living with type 1 diabetes use pump therapy and the rates are actually much smaller when you look across the globe in Europe on aggregate, probably closer to 20% for example. So lots of opportunity for the markets to grow. Our data would suggest that that market in the United States is growing somewhere around a 9% CAGR and in Europe, it's growing somewhere around a 5% CAGR. So both areas have markets expanding.

And I think the way -- the reason I refer where we are with the pediatric patients is because I think that's where -- if you want to see where this could go, I think the pediatrics are good indicator because people will get more and more familiar and comfortable with these technologies and once you typically adopt pump therapy, it’s highly unlikely that you then revert back to the injections, just because of all the advantages.

So I think over time, this market will continue to accelerate. I think all technologies are helping to drive penetration of pump therapy and that goes from AP to CGM to patch pumps. But clearly Omnipod is a huge contributor there, because 80% of our customers are coming from multiple daily injections. And so we're clearly driving growth in the overall pump market. That's true in the United States without a doubt and it's likely very true in Europe as well although we don't yet have great visibility to that data. That will change obviously as we get our feet on the ground and kind of start to take ownership of that business.

The second part of your question, I get really excited about the type 2 insulin dependent population, because it's an area today that manufacturers haven’t paid a lot of attention to for a variety of reasons, but I think that Omnipod has potential to drive tremendous value for that patient population and as we think about our concentrated insulin programs that help us unlock that, what we're doing is really understanding better the needs of that patient population. And we can do that because today we've got 13% and growing of our users that are type 2 and we're doing a tremendous amount of human factors work and research with that patient population to sort of understand what does that user interface need to look like to make it a great experience for them. So I think we're really going to see with the launch of these two products acceleration in those markets and that is -- that opportunity is just as big as the current type 1 opportunity.

[Operator]

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

[Patrick Sullivan, Chairman and CEO]

Thank you, operator. I am absolutely thrilled with the performance of the company in 2017, delivering on four very spectacular and significant accomplishments. CMS coverage, the submission of DASH, implementation of our plan to go direct in Europe, breaking ground on a US manufacturing operation and continuing to deliver strong performance. I’d like to thank the Insulet employees for their hard work and commitment to easing the burden and improving the lives of people living with diabetes and other diseases. Thank you for joining us on the call today and we look forward to speaking with you on our first quarter conference call. Thank you very much.

[Operator]

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