Insulet Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
November 7, 2024

There are 14 speakers on the call.

Operator

Good afternoon, ladies and gentlemen, and welcome to the Insulet Corporation Third Quarter 2024 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. 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.

Speaker 1

Thank you. Good afternoon, and thank you for joining us for Insulet's Q3 2024 Earnings Call. With me today are Jim Hollinshead, President and Chief Executive Officer and Anna Marie Chadwick, Chief Financial Officer and Treasurer. Both the replay of this call and the press release discussing our Q3 results and 2024 guidance will be available on the Investor Relations section of our website. Also on our website is our supplemental earnings presentation.

Speaker 1

We encourage you to reference that document for a summary of key metrics and business updates. Before we begin, we remind you that certain statements made by Insulet during the course of this call may be forward looking and could materially differ from current expectations. Please refer to the cautionary statements in our SEC filings for a detailed explanation of the inherent limitations of such statements. We'll also discuss non GAAP financial measures with respect to our performance, namely adjusted EBITDA and constant currency revenue, which is revenue growth excluding the effect of foreign exchange. These measures align with what management uses as supplemental measures in assessing our operating performance from period to period, and we believe they are helpful for others as well.

Speaker 1

Additionally, unless otherwise stated, all financial commentary regarding dollar and percentage changes will be on a year over year reported basis with the exception of revenue growth rates, which will be on a year over year constant currency basis. With that, I'll turn the call over to Jim.

Speaker 2

Thank you, Deb. Good afternoon and thank you for joining us. We delivered another strong quarter of financial results and achieved several outstanding milestones throughout our business. I am proud of what our team accomplishes every day to create better health outcomes for our customers, set new standards in the management of diabetes and drive success across our organization. The robust momentum we saw in the first half of this year has carried into the back half, putting us on track to close out another impressive year and generate over $2,000,000,000 in full year revenue for the first time in Insulet's history.

Speaker 2

Near the end of August, we received FDA clearance for Type 2 label expansion for Omnipod V, which is a testament to the strength of our submission and powerful clinical data. We are excited about our opportunity in the Type 2 diabetes market and building upon our strong established foundation for long term growth. In the Q3, our global new customer starts grew sequentially and over prior year. This included sequential growth in the U. S.

Speaker 2

In both the Type 1 and Type 2 populations. Internationally, our strong momentum also continued with stable sequential new customer starts, proof of the robust demand we are seeing for Omnipod 5 considering the typical seasonality that occurs during the slower summer months in our international markets. Omnipod 5 is winning in every market in which it is offered and Omnipod is now the number one insulin pump for new pump users in Europe. We remain confident in our expectation of sequential and year over year new customer starts growth for both the U. S.

Speaker 2

And international in the Q4. We have a clear strategy focused on expanding the Omnipod 5 platform, driving growth in the U. S. In both Type 1 and Type 2 and accelerating international growth and expansion. Our recent milestones are key indicators of the progress we continue to make and the momentum across our organization to achieve our strategic goals.

Speaker 2

And this momentum is reflected in our strong financial results. In Q3, we achieved our highest quarter of total revenue dollars driven by total Omnipod revenue growth of 26%, including U. S. Growth of 23% and international growth of 35%. And we continue to expand margins as we scale, execute and drive efficiencies across our global business.

Speaker 2

Anna will take you through the financial details for the quarter and provide an update on guidance. I will focus my remarks on 3 key areas. First, our Type II label expansion, the market opportunity and our commercialization plans. 2nd, our cascade of innovation and how it supports our strategy to drive growth in both the U. S.

Speaker 2

And internationally. And third, our customer base and market leadership. Let me start with our recent Type 2 label expansion, which makes OmniPod 5 the first and only AID system indicated for both Type 1 and Type 2 diabetes. OmniPot 5 continues to be the game changing offer we thought it would be. And now we are bringing all the benefits to individuals with type 2 diabetes that we already deliver to those with type 1, namely unmatched form factor, ease of use, affordability, pay as you go economics and widespread access through the pharmacy channel.

Speaker 2

All of this together with CGM integration and compatibility with Android and iOS based smartphones. And most importantly, all while delivering great clinical outcomes and quality of life. Omnipod 5's Type 2 label expansion further strengthens our growth trajectory. In fact, Type II users represented over 25% of our U. S.

Speaker 2

New customer starts in the Q3 as we drove ramping adoption during September. In the U. S, our Type II indication significantly expands the total addressable market for insulate by making Omnipod V commercially available to approximately 6,000,000 people who live with insulin requiring type 2 diabetes. This market includes 2,500,000 people who are insulin intensive and on multiple daily injections. We estimate that market is less than 5% penetrated with the majority of current users using Omnipod.

Speaker 2

The other portion of the market includes over 3,000,000 people that use insulin as a basal only therapy every day. In order to continue expanding our reach to Type 2 patients, we are well underway on an initiative to expand our sales force and commercial relationships to align with the immense opportunity at hand. We have begun the process of growing our team in anticipation of Type 2 clearance earlier this year and we continue to expand today. This strategy is consistent with our established U. S.

Speaker 2

Commercial playbook adding feet on the street to build on our existing relationships with endocrinology practices, while also broadening our reach into high prescribing PCP practices. With this expansion, we expect to reach over 40% of the 2,500,000 type 2 insulin intensive population during 2025 and we will also be able to go deeper into PCP practices where we are already receiving great inbound interest. Additionally, we continue to complement our direct selling model with DTC. We expect our Type 2 label expansion will make our DTC efforts and awareness initiatives even more efficient. Historically, over 50% of our DTC leads are from individuals with Type 2 diabetes and now we can get those customers quickly onto Omnipod 5.

Speaker 2

We are making all of these investments thoughtfully and as our Q3 results demonstrate, we are committed to driving further margin expansion. Let me now discuss our cascade of innovation and how we continue to strengthen our market leading position as we expand our OmniPod 5 platform. Last quarter, we announced the full market release of OmniPod 5 with Dexcom's G7 in the U. S. Starting with specialty pharmacies and communicated that we would ramp G7 compatible pods broadly through retail pharmacy channels over the following months.

Speaker 2

This approach has proven to be very effective and G7 customer starts have consistently met our targets. I'm happy to announce that G7 Pods are now fully available in retail pharmacies, in addition to customers also having the choice of specialty pharmacy, making it even easier to start on Omnipod 5. Adding to this cascade of innovation in the U. S, we are on track to launch Omnipod 5 integrated with Abbott's Freestyle Libre 2 plus sensor by the end of the year. We are excited to provide customers expanding options as we have experienced great success in providing AIP with the choice of sensors in the UK and the Netherlands with both Abbott and Dexcom CGM offerings.

Speaker 2

At the start of last week, we fully launched the Omnipod 5 iOS app in the U. S. In line with our planned timing. Within hours of our app launch, we became the top downloaded medical app in the iOS app store. Integrated with G6, our app offers enhanced capabilities that are unique and huge time savers for potters, such as a custom foods feature that makes mealtime simpler.

Speaker 2

Early feedback has been extremely positive. We heard from one of our customers who told us, Being able to do daily activities and need to carry only my personal smartphone is the smallest piece of normalcy and the biggest relief. I'm sitting here crying just overwhelmed with how much that means. I haven't felt this normal in years and it means so much. The iOS app is just one more advancement that allows our customers to enjoy simplicity, freedom and healthier lives through our innovative technology.

Speaker 2

And as previously communicated, we remain on track to launch the OmniPhy five iOS app with G7 in the U. S. And are planning to bring this integration to market in the first half of twenty twenty five. Internationally, we are making great progress with our recent launches of Omnipod 5 in France and the Netherlands. And although early, Omnipod 5 is starting to build a growing number of new users in both markets.

Speaker 2

We are on track to launch Omnipod 5 in additional We are on track to launch Omnipod

Speaker 3

5 in additional countries starting

Speaker 2

in early 2025. We are also excited to expand our international offerings with additional sensor of choice further launching Omnipod 5 integrated with Freestyle Libre 2 plus and introducing the integration with G7 in the first half of twenty twenty five. Turning now to our customer base and market leadership. We continue to set the standard and be an industry leader with Omnipod 5. By the end of the third quarter, approximately 90% of our U.

Speaker 2

S. Customers were already using Omnipod 5 as we're approximately 25% of our international customers. This is a testament to the power of Omnipod 5. It wins everywhere it goes. Our strategy remains focused on bringing people out of multiple daily injections onto Omnipod therapy.

Speaker 2

MDI users are our target market and present a large opportunity as we continue to rapidly increase our customer base and drive overall market expansion. Our growth in the 3rd quarter was driven by increasing new customer starts from MDI. As a result, over 85% of our U. S. New customer starts came from people previously on MDI.

Speaker 2

We remain the clear market leader due to the highly differentiated nature of Omnipod. We have 2 decades of experience and investments that have led to our growing economies of scale. We have distinct and sustainable competitive advantages, including world class manufacturing, which allows us to produce tens of millions of high quality safety critical pods. Adding to our scale, during the quarter, we celebrated the grand opening of our state of the art Malaysia manufacturing facility, which provides further flexibility and strengthens our capabilities. Additionally, widespread access through the U.

Speaker 2

S. Pharmacy channel is an important value proposition for our customers. This was a multi year journey requiring significant investments to build the specific expertise and deep infrastructure we have today. We are proud that our time and investments have paid off with nearly 100% of our pods now sold through the pharmacy channel, with the number of HCPs writing scripts for Omnipot 5 growing to over 22,000. We are excited about where we sit today and the significant growth catalyst that we expect to drive further long term value creation.

Speaker 2

With that, I will turn the call over to Anna to walk you through our results and guidance.

Speaker 1

Thank you, Jim, and good afternoon, everyone. Our global team continues to execute on our mission and we delivered another quarter of strong financial results. 3rd quarter results exceeded our expectations. We achieved 25% revenue growth, driven by total Omnipod growth of 26%. Our estimated global retention remained stable and utilization was slightly higher than prior year.

Speaker 1

As Jim mentioned, we grew both global and U. S. New customer starts sequentially. Foreign currency had a favorable impact on total company reported revenue of 30 basis points versus our guide. U.

Speaker 1

S. Omnipod growth was 23%, finishing near the high end of our guidance range driven by ongoing strong demand for Omnipod 5. Our U. S. Revenue growth continues to be primarily driven by increased volume resulting from our success expanding our customer base.

Speaker 1

And the Omnipod V integration with G7 is quickly gaining momentum. We are excited about the opportunity that our Omnipod V Type 2 label expansion brings to drive further growth in our business. We are seeing an uptick in Type 2 new customer starts following the FDA clearance, which given the nature of our annuity model, we expect to contribute meaningfully to revenue starting in 2025. Lastly, U. S.

Speaker 1

Utilization trends were consistent with the prior year. Turning to international, where our team delivered another impressive quarter and once again, sizably exceeded our expectations. In Q3, we drove growth in all of our international markets. We achieved international Omnipod revenue growth of 35%, primarily fueled by continued strong demand for Omnipod 5. Last year's launches in the UK and Germany are driving growth in revenue and new customer starts.

Speaker 1

And while still early days, we are seeing increased demand for Omnipod 5 in France and the Netherlands as well as for our recent integrations with Libre 2 plus While volume is the largest contributor to revenue growth, international revenue also benefited from higher pricing as new and existing customers adopt Omnipod 5. International utilization trends remain slightly elevated versus the prior year due to higher initial Omnipod 5 orders, similar to what we saw following the U. S. Omnipod 5 launch. We remain well positioned for further growth with more Omnipod 5 launches starting in early 2025.

Speaker 1

On a reported basis, foreign currency was favorable 130 basis points over the prior year and 2.30 basis points versus our guide. Drug delivery revenue was $10,000,000 which was above our guidance range due to an increase in orders from our partner. Gross margin was 69.3%, up 150 basis points, primarily driven by pricing benefit in both the U. S. Pharmacy channel and our international markets as well as ongoing improved manufacturing efficiencies.

Speaker 1

We continue to drive margin expansion as we scale and execute on our initiatives to drive operational excellence across our business. Operating margin of 16.2% and adjusted EBITDA of 23.2% both exceeded our expectations, driven by our strong revenue and gross margin performances as well as the operational leverage we are realizing throughout our business. From a tax perspective, last quarter, we discussed the release of a portion of our valuation allowance. In the Q3, we released an additional $12,000,000 resulting in a non cash tax benefit in the period, which has been adjusted out for non GAAP purposes. We anticipate releasing the remaining balance of $15,000,000 in the Q4.

Speaker 1

We continue to expect our 2024 non GAAP effective tax rate to be in the range of 20% to 25% and for this to be the rate in 2025 as well. Turning to cash and liquidity. We ended the quarter with approximately $900,000,000 in cash and the full $300,000,000 available under our credit facility. Our commitment to drive margin expansion, profitable growth and positive free cash flow is paying off, resulting in our ability to invest in our business and strengthen our overall financial profile. Now turning to our outlook, starting with our 4th quarter revenue.

Speaker 1

We expect total Omnipod revenue growth of 13% to 16% and total company growth of 12% to 15%. For U. S. Omnipod, we expect growth of 9% to 12%. As a reminder, in the Q4 of 2023, we benefited from 2 stocking dynamics totaling an estimated $30,000,000 to $40,000,000 On a normalized basis, underlying growth in the Q4 of 2024 is expected to be approximately 21% in the midpoint of the guidance range.

Speaker 1

For International Omnipod, we expect growth of 30% to 33%. On a reported basis, we now assume a favorable foreign currency impact of 100 basis points. Finally, we expect 4th quarter drug delivery revenue to be approximately $7,000,000 to $8,000,000 As a result of our 4th quarter revenue expectations, we now expect the following for the full year. We are once again raising our expectations for total Omnipod revenue growth to a range of 21% to 22% and total company revenue growth to a range of 20% to 21%, putting us over $2,000,000,000 of total revenue for the year. For U.

Speaker 1

S. Omnipod, we are raising the low end of our revenue guidance range and now expect growth of 19% to 21%. For International Omnipod, we are raising our revenue growth expectations to a range of 25% to 27%. On a reported basis, we now assume a 100 basis point tailwind from foreign currency. Our outlook for our international business is strengthened by the success we are achieving with Omnipod V, which has resulted in significant revenue outperformance and are raising international Omnipod full year outlook by 1700 basis points since the start of 2024.

Speaker 1

Lastly, for Drug Delivery, our outlook has improved and we now expect a smaller decline in the range of 5% to 10%. Turning to 2024 gross and operating margins. Given our strong performance to date and confidence in our outlook, we now expect gross margin to be approximately 69%. We also remain committed to driving further operating margin expansion as we continue to gain efficiencies across our organization and improve our operating leverage, even as we continue to heavily invest for the long term profitable growth. As a result, we are once again raising operating margin guidance another 50 basis points to approximately 14.5%.

Speaker 1

In closing, Insulet continues to be the market leader. Our expanding profitability and free cash flow drive our ability to continue to invest in our many growth catalysts. Our cascade of innovation and market expansion strengthen our long runway for sustainable profitable growth. With that, operator, please open the line for questions.

Operator

Thank you. Our first question comes from Travis Steed from Bank of America. Please go ahead. Your line is open. Travis Steed from Bank of America.

Operator

Your line is open. Please go ahead. Our next question comes from Robbie Marcus from JPMorgan. Please go ahead. Your line is open.

Speaker 4

Great. Thanks for taking the questions. Congrats on a really nice Q3. My one question, this quarter Europe really stood out. Sizable beat.

Speaker 4

You said it was number 1 new patient winner and pricing helped. So I just wanted to help clarify a few things. Is that number 1 in just the countries you're selling in? Or is that number 1 overall in Europe, which would be really impressive? How do we think about the magnitude of new patient growth?

Speaker 4

And if you want to throw U. S. In there as well, happy to hear that. And how do we think about the benefit of price and how sustainable is that and how much more is to go in Europe? Thanks a lot.

Speaker 2

Thanks, Ravi. Thanks for the question and thanks for your congrats. The number one is in the markets we serve in Europe. So that's where number 1 across and the reason we think that's impressive is because of course we don't have Omnipod 5 yet in all the markets we serve. So in the countries where we're present internationally, Omnipod 5 is the number 1 pump.

Speaker 2

And so we had a really strong quarter that way. The magnitude of the growth has been terrific. So U. K. And Germany continue strong.

Speaker 2

Netherlands and France are really just ramping, and we expect that to continue. So we're really pleased with the new customer starts growth in Europe. And you had a second question on the U. S. I'm going to turn to Anna, but maybe somebody can remind me what the second part of the U.

Speaker 2

S. Was.

Speaker 1

Yes. Maybe I'll touch on pricing in international. The way to think about it is markets where we've been present with Omnipod 5 a little bit longer like the UK and Germany are getting to that anniversary time period. So just to remind you where we've launched Omnipod 5, we've gone to those health ministries and they have given us a premium for that because they see the value. And we anticipate that as we go to new markets, by the way, France is early stages, but we'll be rolling out in another 10 markets as we move into 2025 here.

Speaker 1

We anticipate some countries will be going through their annual cycle kind of not having that bump in a year over year variance, but new ones are going to be ramping up. So bottom line is we anticipate to see price accretion in the international markets as we move into 2025. Maybe the other part of the question?

Speaker 4

It was just on magnitude of new patient growth.

Speaker 2

Yes. So new patient growth in Europe was stable in the quarter, which was terrific because we would normally see some cyclicality, some seasonality in the summer months in Europe. So stable, really strong new customer starts with France in particular just beginning to ramp. So we were pleased with that. And then in the U.

Speaker 2

S, we had really good new customer starts, strong clear and strong sequential growth in the U. S. In both Type 1 and Type 2 with leading the way with MDI.

Operator

Our next question comes from Jeff Johnson from Baird. Please go ahead. Your line is open.

Speaker 5

Thank you. Good afternoon. Look, I don't want to steal Larry's 2025 guidance question. So let me start with a higher level question if I could, Jim. Over the past year or 2 in the U.

Speaker 5

S, I think we've been adding probably 4 to 5 points of P1 penetration each year and maybe 0.5 point or a bit more of P2. When I look at your business or maybe even more broadly, I guess, across the industry, when I think about manufacturers, when I think about payers, when I think about HCPs, is the bandwidth there that a T2 annual penetration moves to 2 or 3 points in a year or 2, does 4 to 5 points of T1, 2 to 3 of T2, does that equal 6, 7 points of penetration each year for the market? Or is that going to be something less because 1 plus 1 isn't 2 because there's, I don't know, prior headwinds, there's capacity constraints on manufacturing front, doctors only have so much chair time. Can the industry really handle kind of this potential uptick in T2 and keep the T1 penetration going at the same pace it's been going here in the last year or 2? Thanks.

Speaker 2

Thanks, Jeff. That's a great question. It's a little bit of a complicated question. So let me just answer it from our point of view and what we're doing. We continue to lead and extend Type 1.

Speaker 2

We continue to drive MDI growth in Type 1. We're the very clear leaders. So we intend to continue to be the leader and extend our lead in the Type 1 market, which of course drives penetration because we're the player that's clearly leading in MDI and growing the market. On the Type 2 side, we see that as an additive opportunity. The penetration in Type 2 is very low for AID in Type 2.

Speaker 2

And we saw a nice lift in September. So we feel really good about our position there as the 1st and only player with an indication for use in the AID in the Type II space. In terms of the penetration number, we can certainly grow both and we will grow both. The Type 2 will take some market development, but we're already seeing a lift. And we think over the next handful of years penetration can grow in Type 2, 2x or 3x over the span, maybe beyond.

Speaker 2

It's early days. And so we'll be leading and developing that market and we'll continue to lead and develop both type 1 and type 2.

Operator

Our next question comes from Travis Steed from Bank of America. Please go ahead. Your line is open.

Speaker 2

Hey, thanks for getting me back on. Not to fill Larry's thunder, but I know you're not going to guide on 2025 on this call. But I would like higher level like to think about kind of the opportunity you've got with new patient starts in 2025 with Type 2, just kind of all the puts and takes on 2025 that you're thinking at this point. And one of your competitors talking about competitive dynamics, would love to hear how you're thinking about the competitive landscape as you move into 2025 as well. Thank you.

Speaker 1

Great. I'll start with the guidance and maybe Jim will jump in with some of these competitive dynamics. But we're really excited with our growth prospects and where we're here positioned as we're coming to an end here in the Q4. We are, as you indicated here, we're going to return to the industry standard of providing guidance as we get to the February marks of our annual cycles. And at that point, we'll be able to provide the best and most complete picture.

Speaker 1

But just to give you some color, and I'll start here with revenue, which is what drives our entire P and L here. You're very well aware of the cascade of innovations really in the U. S. They really launched here in the second half. And that's where you've seen the sequential new customer starts uptick and those types of things.

Speaker 1

As you know, we're in the annuity model. So most of that revenue growth will come as we move into 2025. And then for the international markets, I started talking about some markets where we launched earlier will go through that anniversary cycle and new ones will start ramping. So again, those are the key dynamics. I touched already on a little bit of price in the international markets where we're going to see greater strength.

Speaker 1

In the U. S, we believe the majority of our growth will come from the base customer start that we're growing right now as we grow our NCS. So again, we feel very well positioned and we'll provide you a lot more color as we move into February.

Speaker 2

Yes. Thanks. And I'll just chime in on the competitive dynamic, Travis. We do have one competitor that comments a lot on the competitive dynamics on the market. And I'll just say, here's what we know.

Speaker 2

We have industry leading retention that remains very high and stable. And with regard to that one kind of noisy competitor, we've actually 2 quarters in a row now seen an uptick of conversions coming from them onto Omnipod 5. So that's what we know. I would just remind every and by the way, Omnipod 5 is so differentiated that we have continued to enjoy ever since launch competitive conversions coming onto the platform because patients find it easy to use. It has all the advantages we've talked about.

Speaker 2

But I'll just remind everybody that our focus is actually on driving growth in the market by focusing on bringing people who are on MDI, multiple daily injections on to Omnipod 5 therapy. And we are the very clear leader in the MDI part of the market. In fact, I would ever since we launched OmniPod 5 in August of 2022, every quarter, we have added more patients coming off of MDI onto AID therapy with OmniPod 5 than all of our competitors combined. And that dynamic continues very clearly today.

Operator

Our next question comes from Michael Pollard from Wolfe Research. Please go ahead. Your line is open.

Speaker 2

Hey, good afternoon. Thank you. I have

Speaker 6

a question on Type 2, the commercial preparation there, maybe it's

Speaker 2

a 2 parter. 1, on

Speaker 6

the field force investment, can you quantify kind of cumulatively when you get through this cycle, how much you're expanding the rep base by? That's part 1. Part 2 then is on the doctor side. I heard, in the U. S.

Speaker 6

22,000 HCPs are prescribing Omnipod V. I'm curious for like Type 2, do you have a sense for how many of those folks have ever written a DASH script? Kind of just interested what the share of wallet opportunity might be for Type 2 versus just getting those HCPs to write Type 2 for the first time? Thank you so much.

Speaker 2

Thanks, Mike. Great questions. I don't want to get into actually quantifying and say headcount or spend. It's the spending is contemplated in our guide and in our margin guide. But what I let me frame and answer your question this way, which is what we're doing is we are extending our current commercial model into more accounts and we've gotten a lot better during 2024 at targeting according to opportunities.

Speaker 2

So you know that most of our call point historically has been with endocrinology practices And what we're doing is taking our current commercial model into extending that into also high writing PCP practices. And so maybe to put some scale on, I would say, we think in our current call point, we reach roughly 30% or so of Type 2 users who are on insulin intensive MDI type therapy. And as we extend into those high writing practices, we'll get to north of 40% of those Type 2 MDI insulin using patients. Now we also will extend, so our current call point treats some basal only patients and that high rating PCP has a higher mix of basal only patients. And so we'll get to more of those patients as well.

Speaker 2

But that might give you a sense of the scale of the expansion here from reaching about 30% of those type 2 intensive users to about 40% of those type 2 users. And then just as a reminder, we've actually expanded the sales force. It's very consistent thing for us to do to expand the sales force. So we've successfully done some expansion in 2024 and now we're planning to extend the same very robust commercial model in Q4 and into 2025.

Operator

Our next question comes from Danielle Antalffy from UBS. Please go ahead. Your line is open.

Speaker 7

Hey, good afternoon guys. Thanks so much for taking the question and congrats on a really strong quarter here. Just a quick question as we think about the Q4 guidance and how you're thinking about the U. S. Omnipod line item specifically.

Speaker 7

It does come in at the midpoint below consensus, but you just beat the consensus number. So just want to make sure we're considering everything in what is usually a seasonally stronger quarter from a deductible perspective and make sure I'm not missing anything there. Thanks so much.

Speaker 1

Great. Thanks, Danielle, for your question. Absolutely correct. At the midpoint, our U. S.

Speaker 1

Omnipod guidance is below consensus and it reflects, I just want to remind everyone, it's a 21% growth on a normalized basis for the stocking activities that we saw a year ago. But at the high end of our guide, we are in line the consensus falls within that line. And it reflects actually that U. S. Omnipod will have grown more than 20% on each quarter of the 2024 calendar year.

Speaker 1

We see a lot of great traction and drivers. We see the trajectory and we're really well positioned here. Our guidance really reflects our best available information at the moment and that's what we're giving you all. So we are very excited and very well positioned to be at the midpoint of our full year guidance range at the 20% mark for U. S.

Speaker 1

Omnipod.

Operator

Our next question comes from Patrick Wood from Morgan Stanley. Please go ahead. Your line is open.

Speaker 8

Perfect. Thank you so much. Yes, just one from me and apologies if you already hit this, we're all just juggling a lot of calls today. But, the Type 2 side of things, obviously, label cleared, you said that there was an improvement as you moved through the quarter. I'm just curious, initial feedback from patients.

Speaker 8

I know you've had some experience in that market already, but any learnings that surprised you that would inform thinking about what the ramp of that curve could look like as you move into next year? Just as you get your feet on the ground, how are you feeling it? And has there been anything that surprised you versus your previous expectations?

Speaker 1

Thanks.

Speaker 2

Thanks, Patrick. And thanks very much for the question. We did I would first I'll just say, I was so proud of our team because we didn't expect the label we didn't expect the clearance until later in Q4 and we got it with a month ago in Q3. And so I was really proud of our team's ability to pull together and get everything done that we needed to get done to launch with clearance. And so that was terrific.

Speaker 2

And we did see a lift in September from MDI team, the MDI patients that are coming from Type 2. So it was a nice lift on the Type 2 side. I think that what we've learned both in the month of September, but also over the course of our Omnipod Go pilot as we went into other practices and really tested that model out is that, first, there are just a lot of Type 2 patients out there in the world who are on insulin therapy that might be on a GLP-one and they still struggle with glycemic control. They still have A1Cs out of control. So there's a lot of demand there.

Speaker 2

And the secure T2D trial showed really clearly that those patients can benefit. And the other thing we've learned is that those practices maybe so I would say high writing PCP practices that maybe have not prescribed pumps historically. They really have a keen interest to understand AID technology and they have an even keener interest once they see Omnipod because they have a pre existing conception that pumps are big, hard to use tubed things with cannulas and needles and so on. And when they see Omnipod, they see how simple it is. And we see that out in the market already as we promote.

Speaker 2

And we saw it interestingly even with our investigators who took part in SecureT2D that was one of the things that was really prominently mentioned by our investigation sites is how simple Omnipod 5 was for them and for many of them how that was counter to their expectation. So those are pleasant surprises and we're very, very bullish on continuing to develop that market and drive growth given the need, the clinical need for people who are not controlled even though they might be on insulin and maybe on a GLP-one already and given the interest that doctors are showing in the ease of use of Omnipod five.

Operator

Our next question comes from Larry Biegelsen from Wells Fargo. Please go ahead. Your line is open.

Speaker 9

Good afternoon. Thanks for taking the question. And I guess Jeff is a smart man. I do have a follow-up on the question Danielle asked earlier, but just a different angle here. So Jim, the Q4 underlying U.

Speaker 9

S. Omnipod growth, as you said, is about 21%, which does imply a deceleration from Q3 if we adjust for the stocking a year ago, I think in Q3. So how should we think about the 21% underlying growth in the context of 2025? Does the Type 2 launch help maintain or accelerate the U. S.

Speaker 9

Omnipod growth off of the Q4 underlying growth? Thank

Speaker 1

you. Yes. I'll start with that one. So again, growth over 20%, we're excited by that. The thing to remember is a lot of these NCS sequential and growth we're experiencing also out of our Type 2.

Speaker 1

Given our annuity model, we're going to see more of that benefit as we progress through the quarters here into 2025. So that would be the main driver here for our confidence and our excitement as we move forward. And I don't know if there's Yes.

Speaker 2

I'll just add. As Anna said, we're our approach to this is to be very transparent with our best available estimates and that's what we're giving you. We feel very confident in our guide. And if I go back to the new customer start dynamic, obviously we had clear sequential new customer start growth in the U. S.

Speaker 2

Which by the way we would have had even without the lift in Type 2. So we had clear sequential growth in NCS and Type 1, we had clear sequential growth in NCS and Type 2. And as we said in our prepared remarks, we expect to have and we said this last quarter, but as we said in our prepared remarks, we expect to have year over year growth for the second half in the U. S. So the dynamic is really clear.

Speaker 2

We're confident in our guide. The Type 2 growth gives us even more confidence in our guide for Q4. But as you all know with our annuity model that revenue ramps into 2025 will create a ramping effect.

Operator

Our next question comes from Margaret Kaczor Andrew from William Blair. Please go ahead. Your line is open.

Speaker 2

Hey guys, thanks for taking the question. It's actually Jimmy on for Margaret tonight. Wanted to touch on operating margins, really, really strong performance here this quarter. So maybe you could just talk to some of the points that are driving that leverage and then as it relates to your confidence on sustaining that into next year?

Speaker 1

Thank you, Jamie for that. Great. We are very we have had delivered very strong margin growth and we feel very strongly that we will continue. And as I said before, we're benchmarking here to at least 100 basis points annually of that margin expansion. That's what we've said before and we continue to believe that.

Speaker 1

Some of the key components of that margin as can tell here came from the gross margin expansion we have had. In addition, the scale that we have has allowed us to get some leverage in the operating in the base operating expenses as well. So as we continue to grow, we anticipate growth in gross margin and I have also mentioned this before. In gross margin, we anticipate the growth to be more moderate as we move forward. And the reason for that is we have benefited significantly in the U.

Speaker 1

S. From price appreciation as we have moved out of the DME into the pharmacy channel. And now, as mentioned in the prepared remarks, we're really at 100% of our volume roughly, coming in through the pharmacy channel. So that lift won't be there going forward, but we have many other levers around efficiencies, around how we have the volume come from Malaysia and a lot of other things. And in the international markets, we do anticipate some price accretion.

Speaker 1

So just to wrap it up here, we have benefits coming in from gross margin. And in addition to that, we have the leverage of our scale as we leverage our operating expenses.

Operator

Our next question comes from Izzy Kirby from Redburn Atlantic. Please go ahead. Your line is open.

Speaker 10

Hi, everyone. Thanks for taking my question. I just wanted to ask about the basal side of things. Obviously, you had a bit of a change in your strategy as flagged last quarter there. So just wanted to hear about what you're seeing from patients and providers on the basal side.

Speaker 10

Any sign that you're seeing patients who are on basal perhaps intensifying and moving on to Omnipod now that it's more available to them? And then just on Type 2 more broadly, I guess any value learnings around retention and behavior for these patients?

Speaker 2

Thanks, Izzy for those questions. Let me start with the basal side. We already we know we already have a number of physicians out in the market who have been writing OmniPod5 for basal only patients off label before we got the indication for use. And OMNIC55 is just so simple to use and it's very, very well suited to those patients for a number of reasons. And we will obviously promote to those patients.

Speaker 2

The secured T2D data showed really clearly that basal only patients benefited. That population, that study population had about 20% of the patients in it who are basal only patients and they have the same benefit as patients on who are on multiple daily injections. So we know it's a huge benefit to them and the question is who's out there that's on insulin therapy that's not controlled. That's really the target market and that would be both intensive users and basal users. And as we extend our reach into those high riding TCP practices, we'll find more and more of those patients.

Speaker 2

So we're bullish on both sides of the Type 2 market. On retention, that's a really good question. Our customer base does include a portion of Type 2 patients. Our retention has remained strong. It's mostly Type 1, but our retention has remained very strong.

Speaker 2

We do anticipate over time that what we'll see is that Type 2 patients, they have a lot going on in their lives. They have a lot of comorbidities. I think we'll see different sub segments of Type 2 patients. And so in different parts of the Type 2 population, I think it's quite likely that we'll see different usage patterns and maybe some lower retention in parts of the type 2 population. But all of those patients are incremental to our business first, I would say.

Speaker 2

So it's all additional volume and additional patient growth for us. And over time, we'll be building more and more customized offerings for type 2 patients, which is something we'll be doing over the next few months several quarters and really work with the type 2 patients to make their experience on Omnipod V just as simple as possible, so we can give them the same kind of market leading retention on therapy and experience in therapy that we've given all of our patients historically.

Operator

Our next question comes from Mike Kratky from Leerink Partners. Please go ahead. Your line is open.

Speaker 11

Hi, everyone. Thanks for taking our questions. Can you provide some additional color on how much of a commercial impact you've seen either positive or negative from some of the CGM integrations that have transpired this year, both within your own products or competitors getting a bit of a head start, how meaningful of an impact would you say these integrations are having on new starts or your existing customer base or any commercial dynamics?

Speaker 6

Thanks, Mike. I'll start with that and

Speaker 2

I don't know if Anna will want to add some commentary. Our sensor integrations have been terrific for us and for our patients. So in the middle of the year in the U. S, we launched our G7 integration. G7 obviously very highly prescribed sensor in the U.

Speaker 2

S. Market. We were really successful with that through specialty pharmacy and obviously are now fully in retail with the G7. And that's been a really material part of our new customer starts. We still start a lot of G6 patients as well in the U.

Speaker 2

S. Market. So providing choice of sensors has been a big boon to our patients and for us and our new customer start growth. In Europe, obviously, we launched in Europe initially with the G6 integration and then we most recently launched a sensor of choice integration in the U. K.

Speaker 2

And the Netherlands. And so in those markets, the customer has a choice between the G6 sensor and the Libre 2 plus sensor. Those markets have both grown really well and both of those both the Libre and the G6 integrations have done very, very well for us. And we're very excited as we said in our prepared remarks to be bringing the Libre 2 plus sensor integration by the end of the year to the U. S.

Speaker 2

So we'll have 3 sensors available to customers in the U. S. And every time we've launched a new sensor integration, it's been it provides more choice to our customers, which is obviously a benefit to them, but it's also given us tailwinds of growth.

Speaker 1

Maybe I'll just add a perspective with our most recent iOS launch here with it applies right now in the U. S. With the G6. But I mean the success that we're seeing with the amount of downloads, the speed, how our customers are responding to it and everything gives us even that greater confidence that we will continue in that path to have more of those available through iOS in the future. So I just wanted to add that commentary.

Operator

Our next question comes from Jayson Bedford from Raymond James. Please go ahead. Your line is open.

Speaker 3

Good afternoon. I apologize for the background noise. So I have a clarification and a question. Just a clarification on the international strength. You mentioned the slight uptick in utilization.

Speaker 3

To be clear, there was no stocking benefit to quantify. This is just a natural occurrence when you launch Omnipod 5. That's just a clarification. The question is just on your user base in the context of pricing, if 90% of the U. S.

Speaker 3

Users are on Omnipod 5, 25% in Europe, how high can your European base go in terms of Omnipod 5 adoption?

Speaker 1

Great. I'll take the first part here. In terms of our international strength and the utilization uptick, We view that nothing to do with stocking. This is entirely to do with when you launch the new product similar to what we saw in the U. S, probably at a little smaller degree, but people just get maybe a couple of two orders at once just to get some backups for their usage later.

Speaker 1

So we're seeing some of that similar dynamic in the international markets where we've launched.

Speaker 2

Yes. Thanks, Jason. I'll just on how high the usage of Omnipod 5 can go in our international markets. I would expect to see a very similar dynamic in international markets as we've seen in the U. S.

Speaker 2

Market, which is Omnipod 5 becomes the AID of choice, and including in our own customer base. And so over time as we bring Omnipod 5 across our international markets, I think it will be by far the predominant used products in our portfolio. But it will there's a little we've talked about this before. In Europe, people are on contracts and so even converting from in most markets even converting from DASH onto Omnipod V, we'll wait for the contract period to come up. It's usually a 4 year reimbursement cycle for them.

Speaker 2

And so we won't see it move as quickly, but over time we'll see Omnipod 5 as our clearly leading offer in our portfolio in our international markets. And as we said, Omnipod 5 already just with the markets we've launched in Europe is the number one pump in Europe in the markets we serve. And so you can see the power of it. We expect to see really strong new customer starts as well as we get Omnipod 5 rolled out internationally.

Operator

Our next question comes from Matt Taylor from Jefferies. Please go ahead. Your line is open.

Speaker 12

Hi. Thanks for taking the question. I guess I wanted to follow-up on the Type 2. It's very exciting stuff. Your competitors put out some estimates with market research that they think the market could get to 25% penetration in a 3 to 5 year timeframe for intensive type 2 in the U.

Speaker 12

S. And I guess I was just wondering what your thoughts were on that. Do you agree with that number directionally? Do you think that's in the ballpark? Have you done any research to confirm that?

Speaker 2

Thanks, Matt. It's a great question. We're very bullish on Type 2. We have such a great opportunity with Type 2. And we're the 1st to market with AID and we're the 1st to market and only AID in the market with the product that overtook all of the AID players in the Type 1 market.

Speaker 2

And if anything, I think we have a clearer right to win in the Type 2 market because OmniPod 5 has all of the benefits. It's so easy to use, easy to set up, available in pharmacy where patients get their insulin, easy access, pay as you go, all the things we talk about all the time. So I think we have a very, very clear right to win in the Type 2 space. The secured T2D data is really remarkable. And so we're very bullish on it.

Speaker 2

I think we said earlier in Q and A that over the next handful of years, we think penetration could double or triple in the Type 2 space. We'll be the player that does that. It's very clear that we're developing the market. We're the ones who lead the market right now. We're number 1 in the market right now.

Speaker 2

And we're very optimistic about growth in the space. It's early days. We'll see where we can take it, but we think there's a big growth ramp for us over the next few years in Type 2.

Operator

Our next question comes from Matthew O'Brien from Piper Sandler. Please go ahead. Your line is open.

Speaker 12

Afternoon. Thanks so much for taking the question. We'll talk about the pharmacy channel a little bit. You've had a competitor on the durable side in that space through the last few quarters. And then yesterday, your noisy competitor also mentioned that they just got their first contract signed.

Speaker 12

So can you just talk about your ability to defend your position in that channel? And then more specifically on the pricing side to make sure, because I know they're going to push on the pricing side. Once they get bigger and bigger there, how do you defend your pricing within the pharmacy channel? Thank you.

Speaker 2

Great question. Thank you. I'll just start by saying that we have a very strong position in the pharmacy channel and the reason we do is because Omnipod fits the pharmacy channel so well. 1st as a product, the consumable is the pump, it comes in a box, you get at the same place you get your insulin. And we have Part D reimbursement, which is the pharmacy benefit reimbursement.

Speaker 2

So the product is the channel. And it meets all the needs of all the stakeholders in the channel. So it's very easy for patients to use. It's very easy for physicians to write because it's full pharmacy reimbursement. They can write a prescription off and they can write a prescription in their down in sort of a drop down menu so that they can just send it to the local pharmacy.

Speaker 2

It's great for payers because we have very high member satisfaction for payers who for patients who go on OmniPod5 And it's great for PBMs because we do so much volume through the channel that our PBM partners get a lot of revenue off of our rebate money. And so it's a great business system for us and for all of our stakeholders and we're very strongly positioned. As far as price goes, those are negotiations. We negotiate our PBM contracts every year. We're very used to it.

Speaker 2

There's a win win there for volume against rebates for us. We have great relationships. And this is a capability we've built up over several years, relationships and contracts. We have many, many contracts with PBMs in the industry. And just as a reminder to everybody, we signed our first PBM contract in 2016.

Speaker 2

I'm sorry, no, let me correct that. We started the process of negotiations in 2016. We signed our first contract in 2017. So we've had our contracts with PBMs now for more than 7 years. We have a lot of experience in this space and we're very confident in our ability to defend our position.

Operator

Our next question comes from Chris Pasquale from Nephron Research. Please go ahead. Your line is open.

Speaker 9

Thanks. Jim, you guys have mentioned some of

Speaker 11

the work you're doing on fully closed loop algorithms. It seems like broadly there's a push across the industry right now to develop offerings that would do a better job helping those patients who aren't quite as actively engaged with managing their own disease.

Speaker 9

Could you give us an update on

Speaker 11

where your work on that front stands? How you're thinking about it? Is this a solution for a narrow segment of users or something that has broader applicability? And then how close are you to having something that could be ready for commercial use?

Speaker 2

Yes. Thanks, Chris. As you know, we have we've talked publicly, we talked at ADA about 2 separate and parallel algorithm development programs. But let me just start by saying something about our current algorithm. The Omnipod 5 algorithm is a great algorithm.

Speaker 2

It produces fantastic results. You can see from our real world evidence, which includes all of our users in effect. We see all corners of usage. We have industry leading time and range with very low hypoglycemia. And so our current algorithm also responds really well to missed boluses.

Speaker 2

And so when Omnipod 5¢ is a missed bolus, it will deliver a significant percentage of total daily insulin to bring the patient back into range. So our current algorithm performs really, really well at a population level and for all the individuals using it. Now having said that, we have 2 programs working on different algorithms with different concepts. One of which I would say is closer to a fully closed loop algorithm, but 2, both of them have been accelerated because of all the evidence we get off of actual patient usage. So even after the first 30,000 patients on Omnipod, which was quarters ago, we were able to see patterns of usage that allowed us to do in silica simulation.

Speaker 2

So we use our data sciences and big data capabilities to simulate adjustments to the algorithm. And that's what's allowed us to get into early clinical trials with 2 different algorithm programs that we've shared some of that data over the course of the last year. So we see real opportunity to drive improved algorithms and with a couple of different approaches and we're happy to be able to accelerate that program. But we also know we're delivering great glycemic control and outcomes in the market right now.

Operator

Our next question comes from Joanne Wuensch from Citi. Please go ahead. Your line is open.

Speaker 1

Thank you so much for taking the question. I'm curious, it's just about a couple of things where to start. I think I'm just going to start with the impact of integrating Libre and G7. I mean, does that create sort of a step up opportunity for you in terms of new patients? And can you confirm, did you have positive new patient starts this quarter or is that more of a 4th quarter event year over year?

Speaker 1

Thanks.

Speaker 2

Thanks, Joanne. We yes, the integrations with the sensors help us. They give us tailwinds. G7 has been an obvious tailwind for us in the U. S.

Speaker 2

With our new customer starts. And then the Libre 2 plus launches have been tailwinds for us in the U. K. And in the Netherlands. So those are positive for us.

Speaker 2

And as we bring the Libre 2 plus integration to the U. S, we think that will create another growth tailwind opportunity for us. And then in terms of growth, we had really clear sequential growth and new customer starts in the U. S. In both Type 1 and Type 2.

Speaker 2

MDI grew for both Type 1 and Type 2. And we expect to see, as we promised last quarter, we've said all year, we would have sequential growth every year. We delivered that in Q3. In Q4 in the U. S, we will see sequential growth that will also be year over year growth in new customer starts and collectively Q3 and Q4 in the U.

Speaker 2

S, we expect very clearly to have year over year growth for the second half based upon that dynamic.

Operator

Our next question comes from Matt Miksic from Barclays. Please go ahead. Your line is open.

Speaker 13

Hi. Thanks so much for taking the question. So wanted to you mentioned the retention rate and obviously leading in new patient starts. I think, Jim, you talked about overtaking the other players in the space with your pump format. Can you talk a little bit about how you measure retention and how if at all investors can kind of get a sense of how that's trending?

Speaker 13

If it's just rock solid in the mid to upper 90s or if it moves around a bunch? Any color would be appreciated. Thanks.

Speaker 2

Sure. Thanks, Matt. First, let me start with the data. The vast majority of our users in the U. S.

Speaker 2

Market are on Omnipod 5. So that's cloud data. So it's very high fidelity. We can tell when somebody has started. We can tell when somebody has stopped.

Speaker 2

So we have really clear data on this. Our retention remains really high. And so it runs in the I'm going to say the low 90s. I'm going to look around the room and make sure that's right. So it runs in the low 90s and it's very stable.

Speaker 2

It really doesn't move very much period over period. It's a very, very stable thing. We're very focused on creating and delivering an experience with our customers that makes it really easy for them to stay on and we're going to build and continue to build capabilities in that area. But that's to give you a sense of it. It's very stable.

Speaker 2

It's very high, very predictable.

Operator

Our last question will come from Bill Plavonic from Canaccord. Please go ahead. Your line is open.

Speaker 9

Yes, great. Thanks. Good evening. Thanks for taking my question. I'd like to just shift gears.

Speaker 9

I mean, if you've been launching the AID system and just trying to understand the impact you've seen on the commercial organization, I know you're scaling up to maybe go after different customer channels. But what has been the impact on the service to the patients? And has this been lessening with the thought of potentially has this been lessening over time where you're focused kind of more on selling than and less on kind of servicing the patient on an ongoing basis? Thanks.

Speaker 2

Thanks, Bill. That's a great question. Actually, we're really focused on building completely differentiated end to end customer experience. In fact, the way we talk about this internally is that's actually what we deliver to people. We deliver an end to end customer experience that starts with the moment they might be diagnosed or they might be their child might be diagnosed all the way out to Pods4Life.

Speaker 2

And we have I think unique opportunity and unique capability to do that because of the cloud connectivity of Omnipod 5. And so I think our customer service, our customer care, our product support are all really world class. What I'll just say that when we launched OmniPod 5 in the U. S. In August of 2022, you all might remember that actually we had so much demand that for a period of time there, we had trouble answering the phones.

Speaker 2

So there was when we started there was so much demand that we had not really appropriately scaled to support our customers as they got on product and as they get trained. Those days are behind us. We've got we've scaled our commercial capabilities, we've scaled our customer care, we've scaled our inside sales, We've scaled our product support. And we're laser focused on building the best end to end customer experience for users of Omnipod, now and in the future over time. We're really excited about our unique opportunity to do that.

Operator

I'm showing no further questions at this time. I would like to turn the conference back to Jim Hollingshead.

Speaker 2

Thank you all for joining us today. We have strong sustainable competitive advantages that allow us to deliver market leading technology, market leading growth and a strong financial foundation that positions us to continue to drive long term value creation. Our Type 2 label expansion is a game changer and another major milestone for all stakeholders, including investors, employees, HCPs and most importantly, our customers. I'm proud of the work our team is doing to disrupt the diabetes market and improve the lives of people with diabetes. We have a clear strategy to expand the Omnipod five platform, drive growth in the U.

Speaker 2

S. In both Type 1 and Type 2 and accelerate international growth and expansion. We continue to make significant progress in each of these areas and have strong momentum across our organization. I want to thank all of our Intuit employees for their dedication, passion and deep commitment to further our mission to simplify and improve the lives of people with diabetes around the globe. Thank you everyone for joining us today and we look forward to updating you next quarter.

Operator

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

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Insulet Q3 2024
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