No. of Recommendations: 2
Hey Fools,

Sorry this took so long, but were been moving for the last month, so i havn't had as much 'free time' as I would like. Below are my notes on PODD's Q2.

Overall, this was a, shall I say, an "interesting" quarter for PODD? They acquired a 3rd party distrubutor "Neighboorhood", much to my surprise. While this muddies the financials a little bit, as their margins moving forward will now be averaged between the two companies and thus much lower, i believe that the overall thesis is still intact. OmniPod continues to grow at a nice pace, margins are improving on the Pods, international growth continues to be a nice revenue driver, and things remain on track for gen 2 OMniPod to be launched in early 2012.

Here are my notes from the CC.

Acquired Nieghboorhood diabetes, a DME provider.

Why?

1) Acelerates next generation OmniPod launch (+25 sales reps)
2) Cross selling oppurtunities (ex: selling strips & sensors to our customers)
3) Cross selling to Neighborhood customers (10,000 + insulin users)
4) Increases back office capabilities
5) Medicare/medicaid processing when OmniPod gets the nod in the future

Working on ammended insurance contracts on both sides (OmniPod & Neighboorhood), completed by year end. Major focus right now.

Filed 510k for smaller Pod in May 2011 (1/3 smaller/lighter, and GM around 65-70%).

Received set of quetsions last week from FDA, still looking for approval before year end.

CE mark in Europe on next gen OmniPod, working with Ypsomed (european distributor) to launch in european markets later this year.

June shipped pods for first time to GlaxoSmithKline (their partner in Canada), aiming for a launch in 3rd qtr

ADA (big diabetes conference) Omnipod is being used in 50 close loop clinical trials in 11 centers around the world

Sold June 143.8MM in convertible debt june, 2016 3.75%, $26.20 convert strike

repurchase 86 MM notes due in 2013 (15MM left)

No more cash raises needed to reach profitability (I'll believe it when i see it)

32.2 mm in rev for quarter (30%+ organic growth, 40% if including acquisition)

48% Gross margin on Pod, 45% overall

On pace to be Operating cash breakeven by end of 2011!

62.4 MM to acquire neighboorhood, 24.4 MM in stock (1.2MM shares), rest cash

14.5 MM gross profit for qtr

GM going forward 50% on pod, 43-45% range overall

Lots of one time one time fees in the qtr

28 MM/qtr going forward opex, 6 MM non cash

19.4 MM net loss, with lots of one time adjustments

S/O 47.3 MM

106.7MM cash

152-158 MM sales 2011 guidance

44-46 MM next qtr

90k combinses customers when added together with neighboorhood



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1) FDA for next Pod, fair to say no more clinical data needed? Yes

2) Turn around time on these answers? We feel comfortable with them, but can't give timeline

3) Timelines? We don't control that, but see nothing that says year end wouldn't be correct

4) No international revenue this qtr? Correct.

5) Margins going forward? Q3? 48-50% OmniPod, 30-33% for neighboorhood, 43-45% overall, drive op margins higher is a major goal, amending contracting is where our attention is

6) 65% GM for next Pod? Yes, but not internationally (remember, they wholesale internationally)

7) How does economy change your forecast? Not for right now, but long term we dont' know. We feel bullish right now.

8) Guidance moving forward, will you break out OmniPod vs. all revs? Next year, one number with margin guidance.

9) Neighboorhood guidance still same? Yes.

10) One times costs in the qtr? Cost of sales with acquisition, transaction expenses, G&A, public offering, professional fees, 1 month of amortiaztion expense

11) Change to timeframes with dexcom? No change. first 1/2 2012.

12) Abbott rev? 1.3 MM/qtr

13) Patient adds? Step up from a weak q1. Similiar to last years uptick.

14) Cost of the debt conversion? ~6MM for total costs

15) G&A increase costs? More coutries lauching

16) Attrition rate? 9-10%

17) ASP? $28

18) Referrals from other pump companies to Neighboorhood? Dropped off after acquistion, will be better than guidance though.

19) D&A costs? 6MM 3/3 split

20) Stock comp? 1.2/1.5 MM

21) Canada: OmniPod current or next gen? Current OmniPod version.

22) What gets you most excited about cross selling to Neighboorhood? Increasing customer satisfaction by making their lives easier from a delivery perspective, and the outcomes that we can drive

23) salesforce expansion? yes, based on feedback from FDA timeline. Adding 25 more salesteam (75 omnipod + 25 neighboorhood= 100 total)

24) When will one point ordering take place? Jan 1 2012 is the goal.

25) Expansion of neighboorhood across the country (currently they are northeast based): We have a target state in mind, but its going to be slow and well planned. Not a shotgun approach.

26) International margin improvement with next pod? margins are shared with our partners, so we both win

27) Neighboorhood revs for quarter? Neighboorhood rev 2.5 MM for quarter. 15% of their revs are on pumps, which ended from those other pumps companies. We are working to bring them back online.

28) Manufacturing behind on next Pod? Equip arrived late/incorrect. We are being more involved with the process to bring them up to speed.

Conclusions:

Whenever acquisitions take place, I get nervous. We shall see how this one goes. While there are good reasons for the acquisition, this slows down overall growth and pulls down gross margins. If we pick up some new sales reps and the cross selling is successful, then it will be worth it. I'm very much in "show me" mode on this.

OmniPod continues to drive nice growth. 30% revenue growth y/y is nice. The smaller pod should accellerate this, allowing them to continue to take share from medtronic. I don't see anyone else entering the wireless pump space for at least 2 more years, giving PODD a full 8 year head start as the tubeless expert.

International growth remains a HUGE likely plus for the company. They will be launching the smalller Pod in Europe first, which is great. This will allow them to get the kinks out and test the waters to see how the market takes to the new Pod.

Dilution continues to be HORRIBLE. However, they think they have enough money to get them to breakeven (I've heard that before), and they diluted us with the acquisition. I'm finally willing to give them the benefit of the doubt, but will keep a close eye on share count.

There are some warts, and some head scratches here for sure, but lets review the positives:

1) Major dilution is over with (I hope)
2) The ONLY tubeless pump player in the world, now with a 6 year head start over everyone else (should be at least an 8 year when its said and done with, minimum)
3) 30+% revenue growth y/y, which should continue for several more years
4) Gross margins will continue to improve, and move up significantly when next gen Pod is launched (though overall gross margins may not rise as fast, as the international revenue and neighboorhood acquisition will keep GM in check)
5) Next gen Pod is on target for early 2012 in US, late 2011 in europe
6) Overall pump market is significantly under penetrated in US (30-35%) and international (5-10%)
7) PODD is growing faster than the industry as a whole, thus taking market share
8) As big cap pharma is struggling to find growth, PODD may be an attractive acquisition
9) Neighboorhood acquisition should allow for big increases to ARPU (average revenue per user)

I still think PODD deserves a small spot in a portfolio. Emphasis on small. 1%, or 2%. Paring them with other companies, like DXCM, ISRG, MDT, or even JNJ is a smart way to investor for the long term, but balance the risk with other dividend paying names.

Medical device stocks are much more attractive than pharma, IMO. The moats are much bigger, as it is much harder for a physician to switch to a different instrument than it is to switch to a different drug. Relationships are also entrenched, margins are very strong, and their is no risk of generics.

Hit me with questions.

Brian
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