Q3 2019 Earnings Call
Plantation there'll be a question and answer session.
Good question during the session you want me to press Star one on your telephone. Please be advised that today's conference is being recorded if you require any further assistance. Please press star zero I would now like the hand the conference over to your speaker today, Ms., Deborah Gordon Vice President Investor Relations and corporate communications. Thank you. Please go ahead.
Thank you learn good afternoon, and thank you for joining us for Insulates third quarter 2019 earnings call. Joining me today, our Shacey Petrovic, President and Chief Executive Officer, and weighed Mcmillan Executive Vice President and Chief Financial Officer.
A replay of this call will be archived on our website and our press release discussing our third quarter 2019 result in fourth quarter in full year 2019 guidance is also available in the IR section of our website.
Before we begin I would like to inform you that certain statements made by Insulet. During the course of this call maybe forward looking and involve known and unknown risks and uncertainties that may cause actual results to be materially different from any future results implied by such statements.
Such risks and uncertainties. In addition to the inherent limitations of such forward looking statements include those referenced in our Safe Harbor statement in our third quarter earnings release and in the company's filings with the FCC. Please note that we assume no obligation to update these forward looking statement, even if the actual results or future excess.
Patients change materially also unless otherwise stated all financial commentary regarding dollar in percentage changes will be on a year over year basis with that I'll turn the call away Shacey, Thanks, Devin and good afternoon, everyone.
It is an exciting time it in flat as we continue to build on our incredible Roes and progress we delivered another quarter of strong financial and operational performance and we are well positioned to close the year with great momentum.
Our strong performance has been years in the making and is the result of a very large and growing market.
And the work we have done to build a powerful foundation for the company.
Both for type one and type two diabetes segments represent significant unmet need which into what is uniquely positioned to address.
The opportunity a huge approximately 1.7 million people in the United States live with type one diabetes and about the same number in our international markets we serve today.
Additionally, we estimate that the type two insulin requiring population in the United States is between two and a half and 3 million people and growing with a similar size population in our international region.
The opportunity. It's also urgent because many people living with diabetes or not achieving optimal glycaemic targets, which can lead to near and long term health complication.
To unlock our market opportunities. We have spent the last couple of years transforming the business and executing on for strategic imperatives, one expand market access.
To drive consumer focused innovation with our pod therapy.
Three strengthen our global footprint and for ensure operational excellence throughout our organization.
2019 has been a year in which these strategic imperatives are now coming to fruition and our strong results our reinforcing our confidence in infants long term prospects.
We are beginning to realize the returns on our investments and hard work over the last several years and we're just getting started.
The successful execution of our strategy demonstrates that we have the right team and approach to capture the significant opportunities for us.
Improving the lives of people with diabetes remains central to everything we do and we are focused on delivering our life changing innovations to the diabetes community around the world.
During today's call I will discuss key financial highlights and provide an overview of the progress we made on our strategic imperatives.
Ill, then turn the call over to Wade, who will discuss our third quarter financial results in greater detail and share an update to our 2019 outlook. We'll then open the call for questions.
Starting with our financial performance, we have consistently outperformed throughout 2019, and our third quarter was no exception, we generated $192 million in revenue exceeding our guidance by $11 million at the high end and representing a 27% increase year over year.
This was driven by 34% revenue growth in our global diabetes product line with both our U.S. and international operations firing on all cylinders.
I'm proud of the team's progress and execution across our strategic imperatives and the team sustained focus on our mission.
With these strong results, we achieved our fifth consecutive quarter of greater than 20% revenue growth and our fifth consecutive quarter of both positive operating and net income.
In fact, 2019 will mark our fourth consecutive year of greater than 20% annual revenue growth.
Given our sustained outperformance we are once again raising guidance for 2019, which weighed we'll talk to shortly.
Turning to our efforts to advance our strategic imperative.
I will begin with market access, which we have focused on to both increased coverage and enable innovation through the pharmacy channel.
In the third quarter, we continued to successfully expand coverage for commercial Medicare and Medicaid beneficiaries.
Additionally, Medicare beneficiaries continue to represent a growing percentage of our omnipod users.
Not only because of the increased coverage, but also because our product design and functionality are incredibly well suited for the type two insulin requiring population many of whom our Medicare beneficiaries.
We're also increasing our impact through innovation, both in terms of our new product innovation and also our new business model innovation with our unique pay as you go model.
Our recently launched Omnipod dash is available with zero upfront cost an exciting disruptor with several unique advantages for both patients and payers.
Because we know cost and access our hurdle to more people adopting pod therapy through our pay as you go model and the pharmacy channel, we are providing customers access to this easy to use technology with no upfront costs or lock in period.
This means omnipod dash can be used by far more patients many of whom would otherwise not be able to access or afford new technology.
And every quarter since dashes launch a record number of new users have adopted omnipod in the United States.
Based on overwhelmingly positive feedback on dash, we have seen and continue to believe that patients who try omnipod and dash will stay on product and experience its long term benefits.
Our new model and pharmacy access our true differentiators, because they benefit patients and also provide reduced risk and cost of member attrition prepares.
Because of its simplicity low cost and low commitment physicians can feel confident recommending omnipod for a greater number of patients and earlier in the treatment pathways.
The earlier and M.B. I used or adopt pod therapy, the higher the likelihood of better Glycaemic control and the lower the likelihood of near and long term health complications.
As I communicated on last quarter's call physicians have told us. They are now recommending omnipod dash to more multiple daily injection users, particularly type two patients a population many doctors would not have recommended for pump therapy.
Dashes simplicity discretion and ease of use make it very appealing and beneficial technology for people still using multiple daily injections, including those living with type two diabetes.
Hi, good access gains helped drive increased new starts and as is typical of our business. The vast majority of our new starts in the third quarter came from multiple daily injections users.
Growth of Dash continues to be commensurate with our work to establish access and reimbursement.
Gosh represented approximately 50% of our U.S. new starts in the third quarter.
Additionally, over 20% of our total U.S. volume is now going through the pharmacy up from 15% to 20% last quarter and 10% to 15% just two quarters ago.
And for the second quarter in a row, we saw a significant increase in a percentage of our new starts through the pharmacy being individuals living with type two diabetes.
In terms of new product innovation, we are in the final stages of our Omnipod horizon developing and are extremely excited to bring our game changing automated insulin delivery system to the market in the second half of next year.
We have designed to system, we are incredibly proud of and we remain on track to start recruiting for pivotal next month.
This will consist of a three month outpatient clinical study of 240 individuals across a broad age range, including pediatrics. We are excited to send people home with our horizon automated insulin delivery system in a matter of weeks.
With horizon Insulet will be the first to deliver to bliss personal smartphone controlled automated insulin delivery.
Horizons unique form factor and the incredible design work that has gone into securing our algorithm on the pod give insulet strong competitive advantages over other E I'd devices.
Horizons architecture is uniquely positioned to provide more time in close loop because we've done the work to put the algorithm directly on our disposable Todd rather than on an accompanying device the user must carry around.
Our engineering teams have worked closely with their colleagues at Dexcom to enable the dexcom sensor to speak directly to our pod without requiring a pdm or phone to be in close loop.
These highly complex technical programs require great collaboration and great design and engineering work to keep the user experience simple.
Horizon is designed to be plug and play even for new users coming from multiple daily injections.
Over time the system Optimizes automated insulin delivery based on actual daily insulin use which means that should require less ongoing maintenance.
Season will offer in out of the box experience, where anyone can easily transition to our E. I'd system, you simply put I pod and with your Dexcom sensor and within minutes you are in close loop, it's as simple as it gets.
We know that diabetes can be a significant burden and is always front of mind. We also know that users don't want to have to think more about their diabetes and nobody needs are exactly the same.
Rising will offer a personalized approach to customized diabetes management.
One of the systems unique features is the ability to select multiple glucose targets to allow for personalized control and a unique level of customization.
Horizon is designed to provide an unparalleled level of flexibility to give our users personalization and peace of mind.
People living with diabetes helped US design. These and other horizon features we have completed our formative human factor studies and are in the midst of our Summitted human factors testing and feedback has been terrific.
So we're thrilled to be in the final stages of our development work and to bring our advanced system to the diabetes community next year.
In addition to our own internal product development programs, we continue to support tight pools development efforts on an open source AI D loop app that can be accessed through the Apple App store.
Our goal with this collaboration it to position Omnipod to be F.D.A. cleared component of the tide pool loop system and to support patient choice in the market.
Turning now to our efforts to expand globally, we're making great progress on our strategic imperative of strengthening our global footprint in geographies with large addressable markets and sustainable business model.
Direct operations in Europe had been firmly in place for over a year and we continue to unlock new opportunities.
Across our existing and new markets. There is significant unmet need for simple effective insulin delivery and we are enthusiastic about the huge runway in front of us.
We plan to launch a limited market release of Omnipod Dash in the next month in select European markets, and we will continue to roll out dash across Europe throughout 2020.
We know our customers are excited for our latest technology and dash is the platform with which we prefer to enter new markets.
Our team is working on language translation, new market development and betting a potential strategic partners in order to ensure that our go to market strategies are well conceived.
As a reminder, dash is the first step two phone control and we plan to bring horizon with phone control to our international markets.
Looking ahead to the rest of the year, we will remain focused on solidifying our leadership position in international markets in which we had a presence today.
Beginning in 2020, we will look to expand our global footprint into new markets that offer compelling value and opportunity.
There is significant interest and unmet need not only in Europe , but around the world and our international team is prioritizing the most attractive opportunities and go to market strategies, while we would not expect global expansion to add meaningful incremental revenue in 2020, our expansion efforts over the next few years.
We will strengthen and broaden our global foundation and contribute continued significant top line growth over the long term.
Lastly, turning to operational excellence and the ramp of our new U.S. manufacturing facility.
We continue to strengthen our global operations, enabling insulet to produce exceptional high quality products efficiently at scale and eventually at lower landed cost in the United States.
Last quarter, we began production at our new highly automated manufacturing facility in the U.S.
We're now in the process of installing our second U.S. manufacturing line with production of Sellable product on this line expected mid next year.
Manufacturing innovation is a key driver of our 2021 target of 70% gross margin, which we remain on track to deliver.
Given our expectations for continued rapid growth we plan to install our third line in the U.S. also in 2020. This third line will further strengthen our industry leading position in manufacturing and operational excellence and will ensure we are poised for a successful launch of horizon and to meet our growing omnipod demand.
Cross the globe with that I'll turn the call over it away. Thank you as Shacey noted we had another quarter of strong financial and operational performance. We're pleased that the continued execution of our strategy is building value for our shareholders and furthering our mission to improve the lives. So people with diabetes we were.
Remain focused on advancing our innovation pipeline and increasing market access to drive revenue growth.
And operate with excellence across the organization to expand margins.
The third quarter of 29 team, we delivered revenue of 192.1 million representing growth of 41 million for 27%, which was 11 million above the high end of our guidance range.
Breaking this down by product line U.S. Omnipod revenue grew 34% to 109.5 million, which was 7.5 million above the high end of our guidance range than marked our fourth consecutive quarter of accelerating growth in the U.S.
This increase growth rate is mainly the result of accelerating volume growth driven by growing our customer base and adoption of new product innovation with Omnipod.
Primarily through the pharmacy channel.
Also due to the mix benefit on the premium per day and the shift to the pays you go model in the pharmacy.
Our success to date is a testament to the continued execution of our commercial and operational teams as they have simultaneously launched a new product in a new business model and in a new channel, while establishing our first new manufacturing line in the U.S.
International Omnipod revenue grew 35% to 67.7 million exceeding the high end of our guidance range by 5 million, primarily due to increased volume from growing demand for omnipod within our existing European markets.
As a reminder, in Q3, we anniversary our go direct strategy in Europe , and therefore, both periods reflect the 50% uplift in revenue in our European business.
Drug delivery revenue was 14.9 million a reduction of 21% and at the low end of our guidance range as a result updated production planning with our partner.
Turning to gross margin, we delivered 64.1% down 340 basis points year over year, and down 160 basis points sequentially inline with our expectations.
As we communicated on last quarter's call, we expected a sequential decline in gross margin, primarily due to the full quarter ramp of our us manufacturing.
As a reminder, as we increase production, we incur certain period costs, including training and startup costs as well as normal inefficiencies of ramping up a new manufacturing line, we're confident over the long term or highly automated U.S. manufacturing will contribute to expanded gross margin.
This headwind was partially offset by favorable omnipod mix from the launch of dash in the U.S. the move into the pharmacy channel with the pays you go model as well as some favorable customer mix internationally.
Operating expenses in the third quarter were 55% of revenue an increase of 12% over the prior year again in line with our expectations R&D as a percentage of revenue is sequentially lower as we had engineering and operational costs charged the R&D in Q2.
That were associated with our newly constructed U.S. manufacturing facility up until the day, we began producing sellable product.
We ended the third quarter with operating income of 17 million, representing 8.9% of revenue.
Net income for Q3 was just under 1 million and included a onetime noncash charge of 6.5 million relating to the extinguishment of 65% of our 2021 convertible notes.
Following our September notes offering we publicly stated we expected a total non cash charge in the range of 10 million to 15 million with approximately two thirds to be incurred in Q3, and one third to be incurred in Q4 since that time, we've completed our valuation work and now expect the total one.
Time, non cash charge of 10 million were 3 million left to be recorded in Q4.
Let me take a minute to briefly summarize the successful convertible notes offering we completed in September given favorable market conditions and Insulates strengthening financial performance. We felt it was an optimal time to refinance or 2021 convertible notes and conduct a new offering this resulted.
In our raising 800 million and securing a low coupon rate and favorable conversion rate among other favorable terms raising these funds allowed us to repurchase or 2021 convertible notes in doing so we were able to limit future dilution to our shareholders will also obtaining excellent financial.
Terms completing this financing was an important step in executing our long term capital plan.
Again this quarter, we generated positive operating cash flows we ended the third quarter with 637 million in cash and investments compared to 372 million at the end of the second quarter and 430 million at the end of last year. This increase was largely due to the approximate 204.
80 million of net proceeds raised as part of the new debt issuance, which was subsequently used to repurchase the remaining 35% of the 2021 note in October .
We expect to continue to use cash for planned capital expenditures as we invest in our us manufacturing and supply chain operations.
To summarize the third quarter, we're pleased with the accelerated rate of revenue growth and the profitability. We achieved we expect this year's positive momentum year to date to continue through the end of 2019, and we remain well positioned for further revenue growth over the long term.
Turning now to 2019 guidance given our continued financial outperformance in the first three quarters and anticipation that this positive momentum will continue we're raising our guidance expectations for the full year by 15 million at the high end of guidance and 22 million at the low end.
We now expect 2019 total revenue in the range of 722 million to 730 million representing growth of 28% to 29% by product line, we're raising our U.S. revenue range to 410 million to 414 million representing.
Growth of 27% to 28%. This reflects our continued confidence in our strong volume momentum given the ongoing market access and commercial expansion strategies.
As well as continued ramp of our new dash product innovation and move into the pharmacy channel with our pays you go model, where we do not charge for PD items like we did in prior years.
Also included in our guidance is an updated annual PBM headwind of 4 million to 6 million, which has a reduction from our prior guide of 6 million to 8 million due to the continued strength of selling pgms in our DMV and direct channels. We also.
From a stronger tailwind from a dash pod premium compared to our original estimate of net neutral.
International Omnipod, we're raising our revenue to a range of 251 million to 253 million representing growth of 46% to 47%.
Lastly for drug delivery, we're updating revenue to a range of 61 million to 63 million, representing a decline of 8% to 11%.
For the rest of the piano, we're reaffirming that we expect our full year 2019 gross margin to be relatively consistent with prior year. This reflects the benefit of going direct in Europe continued operating in supply chain improvements and the mix benefit of dash and the pharmacy with the pay as you go model as well as some favorable cost.
Summer mix in Europe . This is primarily offset by headwinds as we begin to ramp our first knew US manufacturing line. These headwinds will continue in 2020, as we add and ramp to additional highly automated manufacturing lines in our move toward operational.
Efficiency.
We continue to expect full year 2019 operating expenses to increase approximately 25% primarily due to investing in innovation.
We are committed to investing to unlock our market potential.
We're operating income given our year to date performance, we're now planning to be at the high end of our mid single digit percentage range.
We continue to expect that our capital expenditures will be relatively consistent with 28 team as we invest in us manufacturing to drive redundancy improved efficiency and drive margin expansion over the longer term.
Given the recent refinancing.
Of course of some of our convertible notes, we now expect our non cash interest expense for 2019 to be approximately 25 million and on an annualized go forward basis to be in the range of 30 million to 35 million.
Before I turn the call back to Shacey I want to share my enthusiasm about our performance. It is extremely rewarding to see all the hard work that goes into executing our strategy resulted in positive outcomes for our customers and value for our shareholders. We remain focused on advancing our strategies and we expect our strong performance to continue.
Over the long term, we remain on track to deliver on our 2021 targets of 1 billion in revenue gross margin of 70% an operating margin in the mid teens with that I'll hand, the call back over to Shacey. Thanks weighed on behalf of our entire team at Insulet I want to reiterate how pleased we are with a strong momentum of our company.
2019 has been a year of execution and it is clearer than ever that we have the right team and strategy in place to deliver on our commitment to customers the broader diabetes community and to our shareholders and now I'll turn the call back to the operator for today operator.
Thank you as a reminder to ask a question you'll need to press star one on your telephone.
Draw your question press, the pound or hash key and the interest of time, we ask that you limit yourself to one question and one follow up please standby, while we compile the culinary roster.
And our first question comes from Brian Bleaker with Cowen Your line is open.
Hi, good afternoon, thanks for taking my questions.
Maybe just starting with the pharmacy channel transition you mentioned the pharmacy channel as an overall net positive to US revenue in Q3 and that you now expect a greater tailwind from the pod price in premium I believe previous guidance assumed about a six $8 million tailwind from the pod pricing premium to offset the $6 million to $8 million Pdm headwind, what do you expect now for pricing tail.
And year over year.
Sure. So regarding the transition here, there's really two major components. So as we think about it.
The headwind from the no charge Pgms is actually less than we expected even though we are seeing the headwind as we transition or pays ago model, we're selling more pgms in our legacy DMV and direct businesses as those businesses continued to perform pretty well and continue to grow the other side of it is.
Is the premium that we're getting on the dash, our new dash product as well as in the pays you go model in the pharmacy and so.
Our original estimates given that it was such a new channel we were conservative and I think now we're following more in the middle of our range, where we had run scenarios, but what I have to say is it's still very early days and so we are seeing some benefit today, but we're just a couple quarters into strata.
Gee that.
That has significant change to our business and so now we're finding ourselves kind of in the middle of our scenarios, we're very happy.
For where we're performing right now, but having said that I think we still have a long ways to go to see how this plays out yeah, I think thats right. I mean, it's early days. If you think about it were three quarters into a strategy that took three years to develop and design and will be deploying for many years such as the changing situation channels growing rapidly.
And and so price is changing as we bring on new payers et cetera.
Got it and then maybe just digging into the U.S. number a bit more really impressive results.
Can you provide any more color on new patient trends I guess, assuming that utilization didnt increase meaningfully versus Q2, it seems like us new patient starts.
Mr exceeded 10000 in the corner is that in the ballpark or did utilization increase sequentially I just want to make sure. We don't get ahead of ourselves moving forward. Thank you.
It was another record quarter in terms of new patient starts and so we're not really giving that color I think if you think about what drove revenue. The reason, we moved to volume and give you that kind of highlight around volume and mix is that it's just the primary driver behind revenue.
We move into the pharmacies and now we've got 20% of our U.S. basin, 50% of our new patient starts we start to lose a little bit of visibility to the customer base and not to new patient starts as much but to the whole customer base you can imagine.
We just sort of becoming more like a pharmaceutical company, where we've got visibility to prescriptions as opposed to customers and even that is a little bit delayed. So I, just I hate to sort of.
Voiding the question, but.
Really we just have limited visibility, we think that's the right tradeoff.
Because the pharmacy channel, such a better customer experience and in some more efficient channel for us.
Thank you. Our next question comes from Robbie Marcus with Jpmorgan. Your line is open.
Great. Thanks for taking my question Congrats on a really nice quarter. Thanks Bobby.
I wanted to really try and dive in around the change that's happening in the pharmacy, because it's clear that this is materially increasing the patients that are signing up for dash.
So I was hoping you could give us you know if theres any survey work you've done on needs. It really patients here any kind of qualitative feedback you can provide on what you think it is that's driving such strong patient growth here for cash and the pharmacy.
I think it's a great question you know what's exciting to me is some of the feedback that we're getting from physicians in terms of prescribing omnipod earlier in the treatment pathway and four positions, but they might not have otherwise and the reason why that's happening is number one you know all the things that we know about the.
As you go model, the fact that we've reduced the commitment upfront.
And the lock in period, those are really disruptive and really I think transformative for how clinicians can think about pod therapy for their customers and I think the other thing that we were trying to give color around is just the increasing use among people living with type two insulin dependent diabetes. So we know we're in a strong.
On coverage position in the pharmacy for that population and then as we work to establish more and more Medicare coverage. That's also really important to unlocking the type two in from acquiring patient because we know that 60% of people living with type two are over sorry, 40% or over the age of I'm 60.
So there is a large contingent of people living with type two diabetes that are covered by Medicare. So the work that we're doing to establish Medicare access in the pharmacy is really helping to unlock that huge opportunity and huge unmet need.
Yes, and I'm just one more question here on on Dash.
I think it's really clear the value benefit to patients, having a lower co pay out of pocket.
Bds with very expensive disease.
Right now you're getting most of the new patients from the outside but as you cycle through the year end deductibles.
Reset and as you go through the year, where.
The warranties expire do you think theres, an opportunity here to pick up a meaningful amount of competitive switches.
From tandem and Medtronic. Thanks.
Sure I think we remain really focused on our target segment, which we view as the multiple daily injection user. If you think about why that is and it's really because it's the vast majority of the opportunity even among type ones still 60% to 65% of the.
Most of the opportunity is multiple daily injections, and its 95% or more of the type two population the two and a half the 3 million people living in the United States. So it really is the the larger opportunity and where we're focused.
Change in terms of our trends, we continue to see 75% to 80% of our new users come from that segment and of course that means we still get 20% to 25% of our new users from pump transitions that just less of a focus for us.
Thank you. Our next question comes from David Lewis with Morgan Stanley . Your line is open.
Good afternoon, just two questions for me I'll start with way way can you just to walk through.
The international guidance for the fourth quarter, it's it's lower on a dollar basis and I'm just trying to if you can just help bridge us here to the fourth quarter number just given the underlying momentum in the third quarter. We're just into the fortune I had a quick follow up for Shacey.
You bet Hi, David.
So two ways to think about it no we had a very strong Q3, and so we recognized that our guide is a deceleration from Q3 for Q3 was very strong for us.
We do have a bit more of a lumpier business given that a majority of our business goes through distributors and so we did see insight to a stronger Q3, given the distributor order patterns. There. So we get a bit of that going on from a deceleration standpoint, but then what I would bring us back too is we believe that the international markets were.
We're in given the strong team that we have there and our position in the marketplace that we're in this high teens low twentys range and so that's right where our guide sits including the impact of FX. So we do have about a 4% unfavorable impact of FX included in our guidance. So we're guiding to sit.
18 to 20, if you factor in the 4% unfavorable FX it puts us at 20% to 24%. So we're really right, where we want to be from an international standpoint, including FX granting that we've had a very strong Q3, and it looks like a somewhat of a deceleration, but but again right, where we want to be for.
Before.
Okay, so a little bit pull forward, but the underlying demand you think is there.
We do.
Okay, and then Shacey I know, it's all early but you think about next year should are reiterating the timelines around horizon as we think about next year and just given the the innovation around that product is there any reason to believe that rolling out horizon.
We'll be at all disruptive to sort of the core channel on core product as you think about sort of the introduction of that launch in the back half of next year. Thanks, So much.
Sure David It's a good question something we're working on today in terms of our launch plans and preparation and so of course anything.
That magnitude could offer some distraction, but I'll tell you that the team is doing all the right things, even thinking about market access and how do we leverage all of the market access that we've built in the pharmacy channel for horizon. So that we can have a rapid and broad access across the channel. So I think we're doing.
The right things to try to minimize distraction and be able to bring that probably to market as quickly and successfully as we can because we know people are waiting for.
Thank you. Our next question comes from Jason Bedford with Raymond James Your line is open.
A good afternoon and congrats on the progress just.
Couple of quick ones here. She said I think you mentioned that you believe you're in a strong coverage physician for type. Two is just curious was that in reference to Medicare or you're referring to commercial in general.
Really to both and so it is referring to the pharmacy as a really good channel for type two insulin dependent patients.
Okay, and then in turn there's obviously a few moving parts on price channel et cetera, I just wanted to make sure that you're still expecting.
Growth in the U.S. installed base to be similar to U.S. sales growth is that fair.
What we pointed out the benefit of mix and we talk a little bit to that premium on the pods I would draw you to that and the other reason why we're really giving you the color around volume because if you think about it we're just becoming a bit more like a pharmaceutical company in terms of the visibility and now we've got 20% of our total base.
Going through the pharmacy more than that actually and 50% of our new patient customers and so we're pointing you to volume and then also with the and the benefit of mix in the pharmacy as what are the primary drivers behind a revenue we lose a little bit visibility as we move into the pharmacy.
On primary, especially as you get out from the wholesalers to retail pharmacies and specialty pharmacies and that's the right trade off for sure because we know it's a much better customer experience in a better channel for Insulet and but it is the reality of where we are today.
Shacey with Das have you seen any change in attrition.
We have not you might remember we have been watching that pretty carefully and and of course as I mentioned, we do lose some visibility in the pharmacy, but from what we can estimate we haven't seen a change in attrition.
Thank you. Our next question comes from Gen Antalffy with SCB Leerink. Your line is open.
Hi, good afternoon, guys. Thanks, so much for taking the question congrats on a really strong quarter again, a question for it for you wait wondering if I could push a little bit on the Q4 guidance. It looks like you're assuming some deceleration and I'm. Just wondering what is there anything unique driving that is there seasonality we should be thinking of.
And also one of the other pump companies last night talked about a pause ahead of their new product launch. So I assume the pay as you go model, we wouldn't be seeing any impact from new product cycles, and pauses and such but just wondering if you parse out a little bit what's driving the de sound specifically I'm looking at U.S. Omnipod.
Gross.
Yeah, you bet and we just talked about international a couple of minutes ago, and just to clear that one more time, we do not see any issues in international growth rates in fact.
Ex FX were above the high teens low twentys with a with the guidance of six to 20 with the 4% of unfavorable FX in there so international very strong and on the U.S.
I think it's great, we're talking about 27% to 20% guidance.
Deceleration as a deceleration.
We've had a great year to date and so how we're thinking about it is great year to date, 27% growth.
A particularly great Q3, whereas Shacey said, we had record new patient starts and we're getting to a very strong Q4 of 25% to 29% with our year to date, 27% right in that range in other words, if we perform the way we have year to date will be right in the middle of the range even though.
A low end of the range requires very strong new starts and it would be our highest revenue quarter ever.
So there's a couple of things going on around seasonality.
A couple notes one would be as we're increasing volume and as we said in her prepared remarks volume through the pharmacy now is at 20% as that grows we would expect the headwind from seasonality in Q4 because of the switch from deductibles to copays, but again, it's going to be so.
Mall, and slate and something we're going to be watching carefully here. This Q4, but certainly as we move more and more of our volume into the pharmacy that will become more of a headwind to seasonality year over year in Q4.
But probably going to be pretty small right now just given the percentage of volume through the pharmacy.
The other thing we talked about was monitoring our channel inventory.
We have not seen channel inventory be an issue for us yet.
Theres basically a no net impact again here in Q3.
We did see some inventory start to build in the pharmacy channel.
It's really two stages, there one into the wholesalers and distributors in the second into stocking in the retail pharmacies and that's it without what did increase here in the quarter, but it was offset by a reduction in our DMEA inventories. So there was no net impact on a material basis for sales this quarter.
Our but looking ahead, we do think it will become an impact as we start to mature and grow and add more wholesalers and distributors to our pharmacy.
Distribution channel, so those two things or something to keep an eye on from a seasonality or a phasing standpoint, but we don't.
We're looking at a very strong Q4 here, both international and in the U.S. and.
Yeah, I get that it looks like a deceleration from Q3, but Q3 was an amazing quarter theres, a little bit of tougher comp in Q4, very strong Q4 last year, but we see a very strong performance here again in Q4, okay totally fairpoint in sorry to be sorry to be greedy, there and then and just last question.
Hey, Steve you talked last quarter about how you really saw strength in the U.S. across all pieces of business, including the D. I mean channel you sell type pretty strong type two quarter was wondering if you could give us a little bit more color on whether it looks like that continued into this quarter, but just curious about what you can say as to the drivers in Q3.
You have the U.S. growth. Thanks, so much sure Danielle and I think we'd really covered this well a we saw strength across every channel in the U.S. So that includes pharmacy GMI and direct.
But we are a bit sort of Pasha, it's about that because long term, we do expect that the DMV and add to a lesser degree the direct business will soften as we move more of this business into the pharmacy. So Q3 at you know amazing quarter for US everything was strong at maybe to a greater degree than we expected it to be in the DMC channel.
As we look forward, we expect that to soften a bit.
Thank you. Our next question comes from Matthew Block with Stifel. Your line is open.
Good afternoon, everyone. Thanks for taking the questions.
Maybe to start Shacey I'm, just curious as you're having ongoing dialogue with payers to expand coverage is there anything interesting coming out of those conversations worth sharing how eager open our payers are there any common points to push back in those conversations and are they responding to the new models that you're putting up and I have I have one follow up.
Sure I. The response has been terrific and I think that's evidenced in the broad access that we've established in such a short period of time. If you think about it we really just been at it for a few quarters and we've got more than 50% coverage established now in the U.S. for dash, primarily in the pharmacy channel.
So that is a testament to how well received this risk sharing model is and how novel. It is for the market and I think we see the benefit in how rapidly pairs are establishing access and then also obviously in the record setting new patient starts quarters that we've had over the last.
Three quarters, the one interesting dynamic that I'll point out is it might not be exactly what you're looking for Michael but is around Medicare and other contracting. So if you think about it we now have more than 50% of covered lives established and and we talked about this premium on the pod that was a little bit higher than expected this quarter.
And a lot of it it could be driven also by a pricing for payers, particularly on the Medicare side, where we haven't established contracts yet, but we're having a lot of success with the appeals process or with the exception process. So as we establish coverage with these payers that will actually act as a little bit of a headwind.
As we look to Q4 and beyond into 2020 as we established more access we would expect that price point to come down, especially for pursuing perfect preferred up positions on those payers, so but by and large the discussions have been very productive we feel really good about having a strong foundation for dash and one that will be leveragable for horizon is.
He looks at 2020 and beyond.
I appreciate that that's very helpful. And then I guess the follow up question and for your Shacey again, it for a 20% pharmacy today.
Look out the next five years in your Mind's eye, but would you hope the ultimate channel mix would end up being for you guys.
I, we want the vast majority of our business to be going through the pharmacy, I think theres, some benefit and actually I should take that back we want the vast majority of our business to be pay as you go at we believe that that is the best thing for payers and the best thing for patients and and we see great attractiveness in the pharmacy.
Channel.
I would hope that the vast majority of that would be through the pharmacy channel.
But you know, there's there's benefit and having some of the business start direct in DMD as well and but we do see the best patient experience in the pharmacy channel.
Thank you. Our next question comes from Jeff Johnson with Baird. Your line is open.
Thank you good evening Shacey, maybe at the Man question, then horizon question on the demand side.
Can you break out at all kind of your mix are you seeing any shift in mix at all between T. Two and T. One obviously, you're talking a lot about good T. Two traction, but any way to help us kind of quantify or break that out and same question on the M.B. I cited this one's kind of a tougher question I guess, but.
Any way to know what percentage share capture you're enjoying of new to pump Mds patients relative to the market this quarter versus the last few qualitatively do you feel that's going up.
Great questions, Jeff I'm I'll start with the MD I question.
Very challenging to get good data on this but we do believe that it's increasing as I mentioned in my prepared remarks every quarter. This year. We have had a record number of new starts the vast majority of those being multiple daily injection users adopt omnipod. So we do believe we're seeing accelerating momentum there and that.
Thanks to this investment in the pays you go model and in such a simple easy to use device that is dash and then the other question was regarding type twos and I gave a little bit of color in my opening remarks here again. This is something we're watching very closely we have designed messaging and.
Location for clinicians and patients on the benefits of dash and Omnipod for the type two user and we are starting to see traction there. So we'll call it out as we get more and more of a trend, but this is the second quarter in a row, where we have had a marked increase in the number of new users through the pharmacy that have type two versus type one so it does seem.
Like our early efforts around education awareness are working in this population.
Thank you and our next question comes from Margaret Costar with William Blair. Your line is open.
Hi, This is Brian and then for Margo, Thanks for taking the questions and.
Corner.
Right.
Kind of hit first on on the Medicaid and that's that's becoming a larger part of revenues and Jason you were talking about it a little bit earlier, but can you remind us if there's any meaningful differences in the commercial channel for Medicaid and part of the reason I'm asking.
I'm sure you're all aware that on the CGM slot side, maybe the prerequisites are a little bit different in the reimbursement models a little bit different.
It sounds like it's a slight premium.
For all of.
Is that how we should be thinking about it going forward.
As any kind of different I guess prerequisites to get onto a pump for Medicaid.
Yes, I wanted just clarify and in my opening remarks, and some of these questions that we've covered already and it's really Medicare the has become a growing population for us and we called that out because we've always been a market leader and incredibly strong in pediatrics and as we have started to establish access.
Among Medicare, it's really starting to change the complexity of our particularly our new patient starts where we're seeing more from Medicare and older populations as well as more in type two and Medicare coverage is really helping to drive that.
And when I talked about there being a bit of a premium on Medicare right now that's because we're taking advantage of very successfully the exception and appeals process and as we established coverage, we would not expect to retain that premium as we get coverage with these Medicare pay.
Shares in terms of Medicaid, we continue to see that ticked up but I wouldn't say, it's I would not say that it is one a premium price population and I would not say that it's a outsized a portion of our new patient starts like we see with Medicare.
Got it that's helpful.
Looking at 2020 in the international as you launch Dash and your international markets.
Utilized kind of the same pay as you go model I can appreciate you probably won't be able to do a pharmacy channel but.
Going back to one of the earlier comments you made in clarifying seems like a pay as you go has been one of the bigger catalyst for the U.S. business. So.
Jim can you can analyze that that model and then the follow up with that kind of as impactful as it was to U.S. gross Ah Tony Tony Thanks.
Sure, but in those are great questions and we have challenged our teams across our different international geographies to determine whether or not we can bring value to.
People living with diabetes, and too and governments that are paying for these technologies through our business model and pay as you go we've had some success with that I, particularly I think of an example in Canada for example, but we're still in the early days of understanding you probably know that in many of these international geographies.
A single payer National Health care systems that there's pretty established roots and it can be a pretty.
And task to try to change pathways, but it's something that we're exploring both for the existing markets as well as for new market entries, where we may be able to really bring value through this risk sharing agreement to to these markets.
Thank you Sir our next question comes from Kyle Rose with Canaccord. Your line is open.
Great. Thank you very much for taking the questions again and again congrats on a strong quarter. So just two questions for me one you've talked about the a emerging growth from the type two opportunity, maybe just give us a little more color on what you're seeing from these patients I mean, how are the different.
Specifically I know you talked about attrition, but maybe from a utilization standpoint.
How are they different from.
Requirements on your sales and your customer support teams just things of that sort and then I'll just give my follow up now that hopping Q is you've got ace designation, you've got multiple algorithms both of horizon and and loop.
The only have one CGM partner, Yeah, we saw.
Adam.
You announced a partnership with Abbott the other CGM player.
Do you expect that.
Work with additional CGM is in the future just what should we expect around timing there. Thank you.
Thanks, Kyle so I'll start with type two and really this is Benny and I think an eye opening experience for us because we again had really thought maybe we were limited in this and our ability to serve this population and what we're seeing is because omnipod reduces the total daily dose of insulin and because.
Dash has taken ease of use dash and pharmacy and taken ease of use in access to new levels that we and we have a stronger right to win in this population than maybe we had previously predicted I wouldn't say, we see notable differences in terms of utilization or requirements from our clinical team.
You know typically these patients are being seen buying endocrinologist and so it's the same call point and on the same process in terms of training and implementation for the type two population that requires insulin as it is to type one today, but you know it's early days really and this is two quarters in so ever.
Looking at very closely and as we know we certainly want to provide the same level of market, leading support and for these patients and so if that requires a different type of investment or approach. We will react accordingly, and then the second question was on interoperability and and other sensors, we always design.
Oh, gosh, which is our interoperable pump that will be the basis of the submission for horizon.
To be interoperable, it's why we went to the phone because dexcom is already on the phone with their app and so as Lee Bray, we don't have anything to announce right. Now we are incredibly I'm excited about our partnership with Dexcom on horizon, and but I will say, we see a great experience in Europe , where there's a lot of overlap between.
Leibrand omnipod users as well so we're focused on horizon, and we see great opportunity for interoperability with dash and horizon.
Thank you. Our next question comes from Ravinia Shah with Baird. Your line is open.
Ravi Your line is open if your phone can you. Please.
Again Ravi your line is open.
Your phone speaker, please lets the handset.
We can move on and put them back into queue. If if it comes back on.
Perfect. Thank you. Our next question comes from JP Mccann with Piper Jaffray. Your line is open.
Afternoon. Thanks for taking my questions is actually Madden for JP Shacey as you think about the Dnbi and pharmacy channels going forward and the stocking that you see there you're growing really quickly right now early days, but how do you manage the inventory levels.
In those channels going forward are they meaningful as that is it not that meaningful for you from a stocking perspective on the pharmacy side. So that it's something that's easy to managers that some paycheck to keep a close eye on going forward.
Hi, Matt with pick that one so a very different channels first of all the pharmacy channel is just a couple of quarters old here very early days. So we're.
Signing up wholesalers and distributors seems like every month and expanding our logistics channel here and a significant investment going into the I.T. side of things in EDA interfaces and moving from manual to more automated so lot of work going on in this area, which means that.
We're learning every day, having said that we do have good insights into our wholesale or distributor partners from a reporting standpoint.
We are learning is it's a very efficient channel and and so we've got good insights there as I said earlier, we are seeing that started to build and then the second stage of that is when our product it stopped in retail pharmacies and so that's also very early days as we get our contracts put in place for.
The CBS is the Walgreens and other retail pharmacies and the U.S. and so I think we'll we'll see inventory start to build more in both of those as that channel matures and on the DMC side of things. We're very experienced in this area have a very good handle on our inventories with our DMV partners and manage it along.
With them and so we feel.
Confident there as well and understanding those and we did see those come down somewhat this quarter and it offset the build we saw in the pharmacy. So on a net basis between the two channels. We did not see channel inventory build this quarter. The only thing I'll add in ways right as the channel grows we would expect for a inventory to grow to support.
But the pharmacy is proving to be a very efficient channel. So.
The inventory turns very quickly and it gets distributed very quickly. So it's something we're keeping a close eye on and and we'll give as much color as we feel is necessary to make sure you guys have a good handle on what's going on in the business.
Okay. That's helpful. And then the follow up is for weight actually on the gross margin side you know your.
Slide.
Third sometime next year, how do we think about the headwinds there on the gross margin lines and those two.
Blind Huh.
Other than that.
Sure so as it.
Yes.
Really.
Okay. Thanks for your list I can see things improve and then how you manage.
Manufacturer.
Builds.
You know efficient et cetera. Thank you.
Yeah. So Matt you were a bit in and out there, but I think I got the gist of your question around gross margins and.
This is one of our most significant investment areas right in automated manufacturing here in the us many advantages to that right. We get the redundancy and it is going to be the single largest contributor to us getting to our long term 70 plus percent gross margin targets overtime. What it does mean is this investment is going to create a head.
Win for Us and it is here in the second half of 19 as we start to ramp up our first line and then as we mentioned in our prepared remarks, we're bringing in a second and third line in 2020, so we'll be adding to the headwinds here as we work through 2020 and then the plan is we're learning on line.
One already we're already making adjustments that were learning that we're implementing on line two in line three we feel really good above the talented team that capability that we're building here and and so we're going to be able to leverage this capacity and then what it comes down to is volume. So as we start to scale, we moved from putting very.
Inefficient cost of goods sold inventory into inventory and moving it to more efficient cost of goods sold in inventory. So there'll be an inflection point, we're not giving guidance for 2020, yet, but you can assume that will be having the majority of our headwind throughout 2020, as we ramp the first line and we bring in our second and third.
Third line and that will position us well for efficiencies over the long term.
Thank you. Our next question comes from Matt Taylor with.
Hi, Thank you for taking the questions.
I was hoping for us it could be a little bit more descriptive about the international market dynamics. What are you seeing there that's similar in different to the you asked in terms of.
Patient mix type two and talk a little bit more about next year, you mentioned entering some meaningful new markets what are they in how much growth because today.
Sure. Thanks, Matt the at the first question on.
International markets, it's a little challenging to answer because if you think about our international markets or Europe . When we refer to Europe . Europe is actually you know a dozen different business models different reimbursement scheme and different access availabilities for the technologies I would say that.
The percentage of for example type one in type two varies dramatically across the market depending on the access restrictions, but by and large in these national healthcare systems. There is less access for type two that will take some market development work over the long term to unlock that population, but fairly good.
Good and established access for people living with type one.
Diabetes, and certainly what we see across every international market that we're in today is that we have a differentiated technology that is that patient preferred and growing pretty dramatically across these markets and that's evidenced by the performance this year and what we expect for Q4 and and I think add the SEC.
Hi, this is around the new markets I think you know, we're expecting yeah, and so as we give a little bit of color I wouldn't expect us to add material revenue in 2021, we're not going to list out the markets, but really talking about at you know a handful of markets in 2020, and we've got a lot of work to do in 2020 to two convert our markets to dash.
Then to start to think about new markets to enter into and I'm really excited about the opportunity, but right now we want to make sure that we enter these markets in the right way when we make a commitment to a market, we're making a commitment for the rest of the patients life and so we're being really thoughtful about the markets that we select.
I would expect that those will be other first tranche in 2020 will be in Europe , and potentially the middle East.
Thank you. Our next question comes from Raj Denhoy with Jefferies. Your line is open.
Good evening.
Maybe just a question few shacey on on the Horizon I guess, some I'm curious about.
How.
How confident you are in the timing of the late 2020 approval or the second half of 2020 as you described it with the trial just starting you know, it's essentially a year from now and I guess, given the unique nature of the product with the algorithms residing on the pot itself is there any risk of that that timing could slip a little bit.
I appreciate the question I feel great actually about the timeline, we've got a terrific team developing mess and Dr. I trying line, leading it who is.
Arguably one of the world experts in artificial pancreas research and development. We also I think really benefit from some great regulatory Tailwinds remember, we've got an ice CGM that is already cleared we've got an ace pump that has already cleared and what we're working on is the algorithm clearance and the system clearance. So we've got.
A lot of Tailwinds behind Us and we also benefit from the breakthrough devices program and I just to give a little color. There I think this last I precept with the agency is the seventh one we've had this year. So the level of collaboration and support on behalf. The agency has been fantastic. So if you think.
About the timeline, we feel like we're in really good shape.
This at this trial will take approximately three months and then we'll move into compilation and submission.
And we feel confident that will be on the market in the second half of the of next year.
Great. Thank you.
Thank you and that does end today's question and answer session I would now like to turn the call back to Ms. Shacey Petrovic for any closing remarks.
Thanks, everyone. Just a few weeks ago Insulet was awarded the 2019, Massachusetts Economic impact award. The result of substantial investment and job creation. We have made in Central Massachusetts. This award has been presented since 2003 to honor companies that have made a significant impact on the Massachusetts.
Kind of me and just last week Insulet UK was awarded the medical device company of the year by diabetes professional care Association with celebrate standards of excellence quality and positive outcome led by companies working in the diabetes community I congratulate our entire team for taking home these goals.
Great recognition of everybody's terrific execution, and our deep commitment to our mission. We are just so proud to be making such a positive impact in our local communities and to be making a positive impact on people with diabetes across the globe. Thanks and have a great thing.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating and you may now disconnect.