Embecta Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
February 9, 2024

There are 8 speakers on the call.

Operator

Welcome, ladies and gentlemen, to the Fiscal First Quarter 2024 Investor Earnings Conference Call. At this time, all participants have been placed in a listen only mode. Please note that this conference call is being recorded and the recording will be available on the company's website for replay following the completion of this call. I would now like to hand the call over to your host today, Mr. Prabhvesh Khandewal, Vice President of Investor Relations.

Operator

Please go ahead.

Speaker 1

Thank you, operator. Good morning, everyone, and welcome to Ambecta's fiscal 1st quarter 2024 Earnings Conference Call. The press release and slides to accompany today's call and webcast replay details available on the Investor Relations section of the company's website at www.mbeka.com. With me today are Dev Kodikar, mbeqta's President and Chief Executive Officer and Jay Kelguis, our Chief Financial Officer. Before we begin, would like to remind you that some of the matters discussed in the conference call will contain forward looking statements regarding future events as outlined in our slides.

Speaker 1

We wish to caution you that such statements are, in fact, forward looking in nature and are subject to risks and uncertainties, and actual events or results may differ materially. The factors that could cause actual results or events to differ materially include, but are not limited to, factors referenced in our press release today as well our filings with the SEC, which can be accessed on our website. In addition, we will discuss certain non GAAP financial measures on this call, which should be considered a supplement to and not a substitute for financial measures prepared in accordance with GAAP. A reconciliation of these non GAAP measures to the comparable GAAP measures is included in our press release and conference call presentation. Our agenda for today's call is as follows.

Speaker 1

Dev will begin by providing some remarks on the overall performance of our business during the fiscal Q1 of 2024, as well as an overview of our strategic priorities. Jake will then provide a more in-depth review of our Q1 financial results as well as our updated financial guidance for the year. We will then open the call for questions. With that said, I would now like to turn the call over to our CEO, Jeff Goldacre. Jeff?

Speaker 2

Good morning and thank you for taking the time to join us. With the introduction of the first specialized insulin delivery device in 1924, this year marks the 100th year of our journey to deliver better diabetes scale through innovation. Whether you're newly diagnosed or transitioning to a new line of therapy, our mission is to make a person with diabetes everyday experience As comfortable and convenient as possible, while advancing towards a new generation of life changing solutions, We have been one of the leaders in insulin delivery for nearly 100 years and through our insulin delivery products, we touch an estimated 30,000,000 people living with diabetes in over 100 Developing and providing solutions that make life better for people living with diabetes is at the core of everything we do and is what drives our global team. Turning to our strategic priorities for fiscal year 2024. We will continue to be focused on the same three core strategic priorities that we have had since we became an independent company.

Speaker 2

These priorities have served as the foundation for our actions and decision making, Driving our company forward and they include remaining focused on strengthening our base business while maintaining our global leadership position in the category of insulin injection devices, separating ourselves from our former parent in a thoughtful manner to mitigate risk and position us for success as an independent company and finally investing in growth, Most notably around our insulin patch pump program that is being developed for the Type 2 market as well as seeking M and A and additional partnership opportunities. We are advancing with determination and a sense of urgency in each of these objectives, and I'm very pleased with the progress that we've made in these areas. Turning to some Q1 highlights. First, we published our 2024 Environmental, Social and Governance Report. This report provides a summary of the progress we made in 2023 to develop our ESG strategy, including policies and systems that underscore our commitment to delivering our products and solutions responsibly and with a view towards how our business impacts broader communities in which we operate.

Speaker 2

Next, the team's hard work gained recognition, Leading to the acceptance of 6 MBEKTA abstracts as posters for presentation at the upcoming Advanced Technologies and Treatments for Diabetes or ATTD conference in March. We believe that poster presentations like these continue to validate our value proposition that a larger insulin reservoir would benefit a person with type 2 diabetes and potentially facilitate more adults using a single pump for a full 3 days resulting in a greater health economic benefit to patients and payers. Additionally, Embecta is set to host an industry sponsored symposium at ETTD focuses on unlocking the potential of insulin pumps for personalized Type 2 diabetes care. These educational objectives align with our commitment to innovation and improvements in diabetes care. By supporting this symposium, we are excited about the potential for helping advance informed decision making around insulin pump therapy for patients with Type 2 diabetes.

Speaker 2

During Q1, we also notably advanced our separation programs by completing the implementation of our ERP system For approximately 60% of our revenue base and our manufacturing facility within the U. S, while also operationalizing new shared services on the distribution network serving the U. S. And Canadian markets. Furthermore, we made significant progress in terms of the development of our insulin patch pumps that are being developed specifically for the Type 2 market, including the filing of a 510 pre market application for the open loop version of our insulin patch pump with the FDA.

Speaker 2

I'll share more about these latter accomplishments in the following slides. Finally, during the Q1, solid execution led to financial results that exceeded our internal expectations And based on these results, coupled with our outlook for the remainder of the year, we are raising our financial guidance ranges for revenue and adjusted earnings per share. Next, I would like to get into a bit more detail regarding the advancements we made in terms of our separation efforts. As I just mentioned, during Q1, our team made significant progress in the global implementation of our ERP system, shared services capabilities and distribution network. These are complex programs and we have adopted a phased implementation approach mitigate the separation risks.

Speaker 2

As of today, we've implemented our ERP system and operationalize shared services capabilities and a new logistics and distribution network to support the U. S. And Canadian markets. In addition, we implemented our own ERP in Suzhou, China and Holders, Nebraska, which are 2 of our 3 manufacturing plants. During our fiscal Q2, we plan to implement our systems, capabilities and processes in additional markets, as well as at our remaining manufacturing plant in Ireland.

Speaker 2

As such, by the end of our fiscal second quarter, We anticipate having slightly more than 85% of our revenue base in all three of our manufacturing locations on our own ERP platform. We anticipate implementation of our ERP system and the relevant shared service capabilities in all markets, excluding those in deferred closing jurisdictions within a few quarters. To facilitate the phased implementation Of our ERP solution, distribution network and shared services capabilities, we had requested an extension for certain TSAs and related agreements from BD. BD agreed to provide a limited extension, contingent upon securing an additional private later ruling from the IRS. This ruling would enable us to extend specific TSAs for a limited set of markets until early fiscal year 2025.

Speaker 2

Throughout the company, we have been And we'll continue to exert substantial efforts to mitigate the risks associated with potential disruptions as we transition away from TSAs with BD and implement and integrate our own systems and processes. While we have been generally successful at avoiding major disruptions, There is a possibility of temporary sales disruptions in specific countries as we navigate the complexities of securing all necessary product registrations, licenses and other requirements, while concurrently standing up our own systems and capabilities. Lastly, and as we've mentioned on prior earnings calls, we had completed several important steps in the demerger process our Suzhou China manufacturing entity in order to ultimately transfer that legal entity from BD to IMBECTA. I am pleased to report that we have completed the China legal entity transfer and we anticipate resuming domestic for the Chinese market in our fiscal Q2, which is in line with our previous expectations. We had previously commented that this plant was already manufacturing products for export to other markets.

Speaker 2

This is a significant accomplishment by our team and culminates a process that has spanned years in planning and execution. Turning to our insulin patch pump program. A month ago, we announced the submission of our 510 application for the open loop version of our insulin patch pump to the FDA. This marks a critical milestone in the program. We are pleased to have this filing complete and we look forward to working with the FDA through the review process.

Speaker 2

We are also continuing our development of a closed loop insulin patch pump that is targeted for use by individuals who have type 2 diabetes. The pump hardware is expected to be substantially the same across both the open loop and closed loop versions. This should allow us to streamline development across our patch pump platform while also addressing a potential market need for an open loop pump tailored for Type 2 users. One noteworthy feature of our pumps is the insulin reservoir size, accommodating up to 300 units. We believe this enhancement is crucial considering that Type 2 users typically require up to 100 units of insulin daily.

Speaker 2

Our goal is to have a 3 day wear indication for our pumps That would provide an appropriate supply of insulin that better aligns the needs of users and payers with the pump replacement cycle. While our open loop submission is under FDA review, we are also actively advancing our closed loop pump development in collaboration with As a reminder, Tidepool already has a standalone Type 1 algorithm cleared by the FDA and we are working with them to adapt their algorithm into a Type 2 closed loop system. We are pleased with the progress made so far and proud of the team that has managed to execute this program while also maintaining their focus on multiple separation activities. Now let's review our Q1 revenue performance in a bit more detail. During Q1, We generated revenue of $277,300,000 which represented an increase of 0.6% on an as reported basis and a decline of 0.3% on a constant currency basis.

Speaker 2

When normalizing for the impact of year over year changes Of the non diabetes products that we contract manufacture and sell to BD, our underlying core injection business grew 0.5% on a constant currency basis. Our Q1 revenue exceeded our previously communicated expectations, primarily due to the timing of customer orders in advance of our aforementioned ERP implementation as well as FX tailwinds in relation to our original outlook. As a reminder, when we provided our initial financial guidance for fiscal year 2024, We indicated that we generated approximately 49% of our fiscal year 2023 as reported revenue dollars during the first half of that year, And that we anticipated generating a slightly lower percentage of the midpoint of our annual as reported revenue dollar range during the first half of twenty twenty four. We continue to believe that this will be the case as the positive impact From the timing of customer orders that occurred during Q1 is expected to unwind during fiscal Q2. And while these remain our assumptions, as I mentioned earlier, we do plan on implementing our ERP system and other previously noted associated capabilities for additional markets within our fiscal Q2.

Speaker 2

And as such, We may see some atypical ordering patterns within the next few quarters. Turning back to our Q1 results, From a geographic perspective, revenue came in better than we previously expected in many regions, including the U. S, Canada and Asia. Regarding the U. S, during the quarter revenue totaled $148,600,000 which represented a year over year decline 0.5%.

Speaker 2

However, when normalizing for contract manufacturing revenue headwinds, our U. S. Core injection business grew by 0.9%. While during Q1, our international revenue totaled $128,700,000 which equated to flat year over year constant currency growth. That completes my prepared remarks.

Speaker 2

And with that, let me turn the call over to Jake to take you through the Q1 financial results as well as our updated full year financial guidance in more detail. Jake?

Speaker 3

Thank you, Dev, and good morning, everyone. Given the discussion that has already occurred regarding revenue, I will start my review of IMbecta's financial performance for the Q1 at the gross profit line. GAAP gross profit and margin for the Q1 fiscal 2024 totaled $185,900,000 67 Percent respectively. This compared to $188,800,000 68.5 percent in the prior year period. While on an adjusted basis, our Q1 2024 adjusted gross profit and margin totaled 186,300,000 and 67.2%.

Speaker 3

This compared to $188,900,000 68.5 percent in the prior year period. The year over year decrease in adjusted gross profit and margin was due to the negative impact of foreign currency translation, primarily due to the weakening of the US dollar. The impact of negative year over year manufacturing variances including the temporary shutdown of our Suzhou China facility as it relates to production for the domestic Chinese market, as well as the impact of inflation on the cost of certain raw materials, direct labor and overhead. These headwinds were somewhat offset by a variety of cost improvement initiatives and our ability to generate positive year over year pricing. As compared to our prior outlook, our adjusted gross margin during the Q1 was better than we previously expected And this was due to the higher than anticipated revenue that Deb referred to earlier, as well as favorable geographic and product mix and FX.

Speaker 3

Turning to GAAP operating income and margin, during the Q1, they were $45,500,000 16.4 percent. This compared to $88,800,000 32.2 percent in the prior year period. While on an adjusted basis, our Q1 2024 adjusted operating income and margin totaled 77,500,000 and 27.9%. This compared to $101,600,000 36.9 percent in the prior year period. The year over year decrease in adjusted operating income and margin is primarily due to the adjusted gross profit changes I just discussed, an increase in SG and A costs associated with standing up the organization as well as higher R and D expenses associated with our insulin patch pump program.

Speaker 3

The adjusted operating income and margin performance during Q1 was better than we previously expected, primarily due to the over achievement at the gross margin line coupled with the timing of R and D spending within the quarter. Turning to the bottom line, GAAP net income and earnings per diluted share was 20,100,000 and $0.35 during the Q1 of fiscal 2024, which compared to $35,200,000 $0.61 in the prior year period. While on an adjusted basis, net income and earnings per share were 35,300,000 and $0.61 during the Q1 of fiscal 2024. This compared to 55,400,000 and $0.96 in the prior year period. The decrease in year over year adjusted net income And diluted earnings per share is primarily due to the adjusted operating profit drivers I just discussed, an increase in year over year interest associated with the rise in SOFR and the impact that had on our variable interest rate debt, as well as an increase in our adjusted tax rate from approximately 25% to approximately 26%.

Speaker 3

I would like to point out that due to certain discrete tax items, our adjusted tax rate in Q1 was higher than our full year guidance, which calls for an adjusted tax rate of approximately 22%. As we move forward throughout the remainder of the year, We would expect our adjusted tax rate to be below 22%. Lastly, from a P and L perspective, For the Q1 of 2024, our adjusted EBITDA and margin totaled approximately $90,400,000 32.6 percent. This compared to $110,200,000 40% in the prior year period. Turning to the balance sheet and cash flow.

Speaker 3

As of December 31, our cash balance totaled 298,700,000 which was down from our fiscal year end 2023 balance of 326,500,000 The decline in cash during the Q1 was primarily due to an increase in accounts receivable. As a reminder, at the time of spin, IMVEXXA entered into factoring agreements with BD in which BD would collect receivables on IMVEXXA's behalf in exchange for fees. The increase in accounts receivable is a direct result of our implementation of certain business continuity processes in North America, including our ERP system that went live in November of 2023 and expiration and termination of a portion of the factoring agreement between IMVEKTA and BD for services in the United States. As such, IMVEXXA is now responsible for the collection of any outstanding trade receivables in the U. S.

Speaker 3

And the increase in accounts receivable is a direct result of this impact and we expect to convert these outstanding receivables into cash during fiscal 2024. That completes my comments on our fiscal Q1 results. Next, I'll provide an update on our full year 2024 financial guidance. Beginning with revenue, on a constant currency basis, We are reaffirming our previously provided guidance range, which called for revenue to be flat to down 2% as compared to 2023. The low end of the guidance range continues to assume that about half of the decline will result from reduced contract manufacturing revenue in 2024 as compared to the prior year, while the remaining 1% headwind continues to factor in competitive shifts negatively impacting volume.

Speaker 3

Finally, the low end of our constant currency revenue guidance range continues to assume that pricing will be flattish as compared to the prior year. While the high end of our constant currency revenue range includes all the same factors impacting the low end, except for a slightly smaller year over year headwind associated with contract manufacturing revenue, as well as the ability for us to modestly raise prices. Turning to FX, foreign currency rates have moved in a slightly positive manner in comparison to our initial guidance. And as a result, we currently expect FX to be a headwind of about 0.4% versus the prior year. This compares to our prior guidance, which called for FX to be a headwind of approximately 1%.

Speaker 3

These FX assumptions are based on foreign exchange rates that were in existence in the late January timeframe, including a euro to US dollar exchange rate of approximately 1.09. On a combined basis, our updated as reported revenue guidance range calls for a decline of between 0.4% and 2.4% resulting in an updated revenue guide of between 1,094,000,000 and $1,116,000,000 Turning to margins, we are reaffirming our guidance ranges For our adjusted gross margin of between 63% 64%, adjusted operating margin of between 23.75% 24.75 percent and adjusted EBITDA margin of between 29.5% 30.5%. Finally, due to improvements in FX, We are increasing our adjusted earnings per share guidance from a range of between $1.90 $2.10 to a new range of between $1.95 $2.15 Our updated guidance range continues to assume that our annual net interest expense will be approximately 116,000,000 that our annual adjusted tax rate will be approximately 22% and that our weighted average diluted shares outstanding will be approximately $58,100,000 This completes my prepared remarks. And at this time,

Operator

Our first question comes from Calum Titchmarsh with Morgan Stanley. Your line is open.

Speaker 4

Thanks very much for taking the question. I have a couple, if that's okay. Firstly, maybe if you could provide some color on your own plans of entering the GLP market with your penneals. Specifically, any thoughts on Lilly's quick pens for Monjoro on the U. K.

Speaker 4

A couple of weeks back, given I think INBECTUS pen needles are the recommended choice on the label for this, how should we think about quantifying opportunity and any additional ones down the line.

Speaker 2

Good morning, Calum, and thanks for the question. As I've commented before, Every time a pen is used all over the world, whether it be for insulin or for GLP-1s, Given our strong share positions in countries around the world, it certainly positions us well for our pen needle to be used. Most of the pens that are being used out there are compatible with our pen needles. The Quick Pen that you particularly referenced on this call, That is the same pen that's used for insulin as well. And certainly, our pen needles have a strong position in the UK.

Speaker 2

I would expect that as GLP presentations maybe change in ratio over time Between vials, pens and auto injectors, as more and more pens get introduced, and I think Lilly has commented publicly that they certainly are thinking about introducing GLP-1s in more countries with pens. We certainly expect to benefit from it. The other thing I would point out is some of the older GLP-1s will turn generic this year. They have in certain countries outside the U. S.

Speaker 2

And those presentations are also often in pens and so that will benefit Certainly, our Penn Needle business as well.

Speaker 4

Great. And then just one more, if that's okay. On the Q1 margins, Specifically on the gross margin side, pretty strong there. You've come in beyond 67% for the quarter, yet you're keeping the full year guide between 63% 64%. Why shouldn't those margins remain at least levels throughout the year?

Speaker 3

Yes. Thanks for the question, So it really comes down to timing, right? I think in the Q1 At a very high level, I think we're extremely pleased with the 1st quarter results and I think it's Particularly so when you think about all the separation oriented work that had to occur by all the associates. I think they did a tremendous job of keeping the business stable and continuing to advance obviously all The ERP initiatives and separation work. So really good start I would say to the year from a financial standpoint.

Speaker 3

We talked about revenue in the Q1 and revenue was better than we had previously expected it to be and we largely attribute that to the timing of customer orders in advance of the ERP. To a far lesser extent, we did see some benefit in the quarter in terms of revenue from an improved FX environment in relation to the original guide. But really the improvement as compared to our own internal expectations for Q1 for revenue really came down to the timing of the shipments. From a margin standpoint that again in relation to our expectations for Q1 gross margin. Q1 gross margins came in very strong at around 7.2% on an adjusted basis, again largely because of the timing of the revenue that we saw in the quarter, as well as the mix of the revenue and the fact that because revenue was a little bit better, we needed to manufacture more product and had some positive variances in relation to our original expectations.

Speaker 3

So as we think about moving forward, as Deb mentioned, I think in his prepared remarks, We think that that timing benefit from a revenue standpoint will largely unwind itself in the Q2 of the year. And we still believe that the first half of the year from a revenues and margin standpoint is pretty much almost exactly in line with what we had communicated in our initial guide 3 months ago. So Hopefully that gives you a little bit more color in terms of the reason for the margin trajectory from Q1 to Q2. On a full year basis, again, we reaffirmed all our previously provided margin ranges, whether it's gross margin, operating margin or adjusted EBITDA margin.

Speaker 4

That's great. Thanks.

Operator

Thank you. Our next question comes from Travis Steed with Bank of America Securities. Your line is open.

Speaker 5

Hi, good morning. This is Carolyn on for Travis. Thanks for taking my questions. I wanted to ask about the patch Just following your 510 submission in January, have you gotten any feedback from the FDA at this point? And then just your thoughts on timing of approval?

Speaker 2

Yes. Good morning, Carolyn, and thanks for the question. Look, we're very pleased to have gotten the submission done almost a month ago now. As you can imagine, this is in the very early stages. Certainly, we know the review is well underway, And our team has been corresponding with the FDA.

Speaker 2

I wouldn't want to get ahead of the FDA with signaling timing certainly so earlier So, so early in the review process, but nothing atypical so far, Caroline. We look forward to working with the FDA and Responding to all the questions that we'll have and certainly when there is something substantial to communicate, we will certainly do so. I should also take the opportunity to mention, while that is under review, we continue to work on the closed loop version of the pump as well. So that work is going on concurrently and we are pleased with the progress on that version as well.

Speaker 5

Thank you. And then can you talk about your constant currency growth expectations for the U. S. Versus internationally for the core injection business ex contract manufacturing for the year and in particular thinking about growth in China actually in the quarter and then just your outlook for the fiscal 2024? Thank you.

Speaker 3

Yes. So I think the growth outside of the U. S. And is really expected to exceed the growth in the U. S, right.

Speaker 3

And that's been a trend, I think largely that we've seen Over the past several years, essentially the U. S. Market being relatively flattish and the international markets, particularly in the emerging markets for us, markets, particularly in the emerging markets for us, growing somewhere in that, let's call it mid single digit 4 ish plus percent type range. And that's sort of our thoughts right now for 2024 is that The U. S.

Speaker 3

Market more developed in nature still has sort of a flattish type constant currency revenue growth rate. And if we were to see more positive growth, That's going to come from sort of the international markets.

Speaker 2

And if I can just add to that, just to connect Dots here. We commented that the Sujo entity, the demerger process is complete. We plan to start production for the domestic China market In this quarter, that plant was already producing product for export markets, but primarily emerging markets. So from a manufacturing standpoint, We are really glad to get some of this separation work done under us and really strengthens our foundation to capitalize, if you will, on the growth that we over the continued long term in the emerging markets.

Speaker 5

Thank you.

Operator

Thank you. Our next question comes from Marie Thibault with BTIG. Your line is open.

Speaker 6

Good morning, Deb and Jake. Thanks for taking the questions and nice quarter. I wanted to ask here a follow-up on the patch pump. Are you Planning to broadly launch or broadly commercialize the open loop patch pump. And as a follow-up on that, now that you've got that submitted, Should we expect R and D investments to step up, to stay flat?

Speaker 6

How are you thinking about the investment needed to get the closed loop pump to FDA submission?

Speaker 2

Thanks, Mary. Good morning. Yes, we do plan at the right time to commercialize the open loop. Our view is that we will do a limited market release of the open loop pump. All the work that we've done so far indicates to us that there is a segment of the market that would benefit and be interested in an open loop pump.

Speaker 2

But obviously, the timing of that is all dependent the review and eventual approval of the process. With respect to R and D expenses for the year, I mean, I'll let Jake comment some more, but certainly, We've included our anticipated expenses for fiscal 2024 in the guidance and it's a little too early to sort of comment long term beyond 24 at this point, but I'll let Jake add additional color.

Speaker 3

Sure. Murray, I think R and D Spending in the Q1 was probably actually a little bit lower than what we had sort of originally internally expected it to be just due to some timing issues and we certainly expect that to pick up in terms of R and D spending as we move throughout the remaining quarters of the year and I think continue to expect that R and D as a percentage of revenue is most likely going to exceed a 7 percentage type level for fiscal 2024.

Speaker 6

Okay. That's very helpful. Let me ask my follow-up on the ERP systems and that transition. I think I heard you say that the sales result this quarter benefited from the timing of customer orders related to that transition. Can you help clarify what That means were they ordering ahead of time to avoid disruption during the transition?

Speaker 6

And then as part of the ERP transition, What exactly remains to be done? And is there a risk around the IRS letter for extension? Do you have any control? What's the plan if that doesn't come through. Thanks for taking the questions.

Speaker 2

Sure, Marie. I'll take that. So with respect to ordering patterns during an ERP implementation, in this case, It's an ERP implementation plus we are standing up our own shared services capabilities and we are standing up our own distribution network. It's quite typical in transitions like this that you have a pause in taking new orders as you're moving inventory from Old distribution centers to new distribution centers. And so in circumstances like these, customers will often place orders in advance because certainly we don't want and they don't want any stock outs to occur.

Speaker 2

And so it's quite typical to get some lumpiness during an ERP transition. And so the timing effect that Jake referred to, Because we were implementing in U. S. And Canada, certainly we had some timing benefit. And I think as I said in my prepared remarks, We are going to do a phased implementation around the world as we continue.

Speaker 2

There will be some atypical ordering patterns That might actually go from quarter to quarter as we complete these implementations. With regard To the private letter ruling that you're referring to, as you remember, BD agreed in principle to grant us a limited extension conditioned upon obtaining an acceptable supplemental private letter ruling from the IRS and that would allow us to extend some of these TSAs until early fiscal 2025. And that again, the reason for that is so that we can phase out these implementations and potentially reduce some of the implementation risk that is inherent in complex implementations like these. We've done significant work On preparing the filings, we've been closely cooperating with BD and providing them with all the necessary information. We anticipate that the filing will be made soon.

Speaker 2

And certainly, we worked with them to make sure that our filing is well positioned. Obviously, I don't want to comment on the review or outcome. We want to get in front of the IRS, but suffice to say that we have contingency plans and we've incorporated or tried to be prudent in our guidance in contemplating the range of potential outcomes that can occur in ERP implementations of this sort.

Speaker 6

That's all really helpful. Thank you, Doss.

Operator

Thank you. Our next question comes from Michael Pollard with Wolfe Research. Your line is open.

Speaker 7

Hey, good morning. Thank you. I have 2, one boring one on the balance sheet and then a question on the patch pump. On the balance sheet, Jake, really appreciated the comments about the factoring agreement. We noticed the step up in AR.

Speaker 7

Is $100,000,000 a good level of AR for Becca to carry? Or would you expect that this number to change one way or the other as you move through the transition?

Speaker 3

Yes, Michael. I mean, I think there could be a little bit of variability In the coming quarters, just as we bring on, first obviously, 60% of our revenue in the U. S. In Canada and then the remaining 40% over the next several quarters. So we could see some variability from quarter to quarter.

Speaker 3

But I think right now our expectation is that as we move throughout the year, we start to in a more meaningful way start to collect that cash that is now sort of sitting on the balance sheet in terms of AR during the remaining quarters of the year.

Speaker 7

The follow-up on the patch pump program. The question is on the production side. Marie asked about R and D. I appreciate the comments there. But I imagine in parallel, you're thinking about how to create a production environment to make a lot of patch pumps and been looking at some of the incumbents here.

Speaker 7

It's It's a very exquisite process and takes a long time and dollars. Where are you in that? I know you're not You're reluctant to comment on timing of all this, but I have to imagine there's some kind of planning going on for commercial production of this product and I'd love to get a flavor for how you're thinking about that and if you're putting CapEx dollars to work today on a project like that.

Speaker 2

Mike, this is Dev. Good morning. Thank you. And you're absolutely right. We have been working on commercial production of the product For a while now, actually, even before the submission was made.

Speaker 2

I would say there are 3 specific things that we focused on. Number 1 is recognizing that there is expertise in production that may be not inherent in the company. We went through an RFP process and selected a contract manufacturer that could help us With production, that's sort of point number 1 and we're working with that contract manufacturer now for over a year. The second thing I would point out is, As we were designing the pump and going through the product development process, we were well aware That manufacturing of a very complex precision engineered medical device is going to be something that is going to be critical to the long term commercial success of the product. And so we embedded designed for manufacturability thinking in the product development process itself.

Speaker 2

And the third thing I would say is, At our R and D site, we actually established a pilot production line and manufactured ourselves. I won't give you a specific number, but let me just say a fair number of devices that we used in the testing that was used to generate the data as part of our FDA submission. With respect to capital, I'll let Jake comment on it, but obviously there was some capital spent on the production lines that I mentioned at the pilot production lines that I mentioned at the R and D center, but nothing unusual. Jake, do you want to comment anything more?

Speaker 3

Yes, I would agree, Dev. And Mike, I think from a CapEx standpoint, for our fiscal 2024, We would expect total CapEx and this is sort of inclusive of the spending that occurs as it relates to DRP to be somewhere between, let's call it $50,000,000 to $60,000,000 in 2024 And that's probably 60% or so focused on sort of the software as a service Capital cash spend that actually shows up as a reduction of cash flow from operations in our cash flow statement. And then the remaining 40% of that is showing up and appearing on the CapEx line within our cash flow statement. So somewhere between $50,000,000 to $60,000,000 in total CapEx I think for 2024.

Speaker 7

Thanks for the color.

Operator

Thank you. There are no further questions at this time. I'd like to turn the call back over to Dev for

Speaker 2

around the world. Our results truly are a testament to their continued relentless focus, who are developing and providing solutions that make life better for people in with Thank you all for attending our fiscal earnings call Q2 earnings call and for your interest in our business.

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