Q3 2020 Insulet Corp Earnings Call
Good afternoon, ladies and gentlemen, and welcome to the Insulet Corporation third quarter of 2020 earnings call.
At this time all participants on the listen only mode later.
Later, we will conduct a question and answer session and instructions will follow at that time.
Anyone should require assistance during the conference. Please press Star then zero on your Touchtone telephone.
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.
Good afternoon, and thank you for joining us for Insulates third quarter 2020 earnings call with me today are Shacey, Petrovic, President and Chief Executive Officer, and Wade Mcmillan Executive Vice President and Chief Financial Officer.
The replay of this call will be archived on our website and the press release discussing our third quarter 2020 results in fourth quarter and full year 2020 guidance is also available in the IR section of our website before we begin I'd like to inform you that certain statements made by Insulet. During the course of this call.
Maybe forward looking in could materially differ from current expectations. We ask that you. Please refer to the cautionary statements contained in our SEC filings for a detailed explanation of the inherent limitations of such forward looking statements well.
Well 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 and we believe that they are helpful.
To investors analysts and other interested parties as a measure of our comparable operating performance from period to period.
Additionally, unless otherwise stated all financial commentary regarding dollar in percentage changes will be on a year over year basis, and all revenue growth rates will be on a constant currency basis and with that I'll turn the call them is easy. Thanks, Dan Good afternoon, everyone and thank you for joining us.
On today's call I'll update you on our progress with our strategic imperatives and the many reasons we're excited about the future.
Wade will discuss our financial results and outlook for the rest of this year and then we'll open the call to your questions.
We remain in challenging unprecedented times.
The progress we've made despite this challenging environment demonstrates the durability of our recurring revenue business model Omnipod differentiated form factor and the commitment and resilience of the Insulet team.
Together, our team has cared for our users who need our support advanced our innovation pipeline and delivered a nother remarkable quarter on all aspects of our business.
We achieved third quarter revenue growth of 20%.
Our U.S. and international Omnipod product lines, each achieved another record revenue quarter.
New customer starts were stronger than expected and we now expect to deliver our fifth consecutive year of 20% revenue growth. Despite the pandemic.
We also expect to finished 2020 above our pre Colgate expectations at the start of the year.
While delivering strong performance. We are also building a foundation to drive adoption in our enormous and growing market over the long term.
This market opportunity will grow significantly as we move into new geographies expand awareness and access to our technologies and bring our game changing consumer oriented innovations to market.
Our highest our long term growth will be supported by the manufacturing expertise required to produce the highest quality products, while increasing gross margin.
We are investing in each of these areas to build enduring advantages that will enable us to improve the lives of people with diabetes for many years to come.
I'll start with expanding access and awareness, we are establishing market access. So omnipod is easily available regardless of age type of diabetes or payer.
Our access through the U.S. pharmacy channel offers customers an unusually simple on boarding experience that.
Benefit Texstar Swift co pays are low and don't come with a large one time cost and virtual training is quick and effective.
Well COVID-19 has presented challenges. It also has pushed us to embrace virtual training, which is now preferred by users and providers we.
We expect these newly developed capabilities to continue to provide value as we scale our business.
Approximately 80% of our new customers in the third quarter were multiple daily injection users attracted to omnipod ease of use and unique form factor.
Additionally, approximately one third of our U.S. new customers were type two up from last quarter.
Fueling the success with M.D. I and type two is omnipod dash since launched 18 months ago awareness of Omnipod dashes on paralleled simplicity has grown and we have built a broad pharmacy access in the United States.
By the end of Q3, we had secured coverage for 65% to 70% of covered lives for Omnipod dash.
Without me potash in the pharmacy MDR users no longer pay large upfront costs or get locked into a four year contract to clients one comp.
They can start on Omnipod with a free trial and no lock in period.
We are thrilled to be knocking down barriers and enabling omnipod to bring improved quality of life and outcomes to more people with diabetes.
Given our progress on establishing broad market access through the pharmacy channel. The time was right to launch a small scale direct to consumer advertising pilot.
We launched the pilot in September and have been learning a ton [laughter], while we know our DTC is working to raise awareness. We're still monitoring key performance metrics such as lead conversion rates and retention of DTC generated customers. We know increased awareness is key to growing adoption and we are delighted to be.
In such a strong position to invest and explore this area.
While our world has been challenged with the pandemic. Our team has not missed a beat in advancing our innovation pipeline I.
Omnipod five is the worlds first two bliss wearable AG system and the only one fully controlled by users mobile phone.
With Omnipod five we will give our customers freedom simplicity and integration with personal consumer technology like no other system on the market today.
Our our automated insulin delivery platform is transformative technology with potential applications in a variety of segments.
And our initial launch of Omnipod five for type one diabetes users aged seven plus marks our first step we are excited about the impact it will make in the market and on the lives of people with diabetes.
Over time, we will be investing in clinical studies to first explore and then prove omnipod five utility in more market segments.
We are thrilled to have recently completed our omnipod five pivotal trial and remain on track to launch in the first half of this coming year.
While our team prepares for FDA submission virtually all of the trial participants have transitioned into a pivotal extension phase they.
They will remain on product and provide us with critical additional data to support omnipod fives value proposition with payers and with clinicians.
This data will also help inform our future innovations beyond Omnipod five.
We are excited to share our clinical results and given the H.T.T.D. has been delayed we are evaluating the best alternative to do so.
Our omnipod five preschool pivotal study with two to six year olds is underway with all 80 participants on product.
Omnipod ranks number one within this demographic and we are delighted to have kicked off our pivotal study to make omnipod five available down to age too.
Our goal is to have the expanded indication by the end of 2021 for this young population and their caregivers.
Additionally, following the FDA acceptance of our type two clinical study protocol in September we began enrollment.
This feasibility study will include 30 to 40 participants each wearing omnipod five for approximately two months.
As we learn more from our growing tied to user base. We know there is a large market for inappropriate type 280 system. We're confident in Omnipod 80 system will provide great value for the type two population and we expect our early clinical work will result in important learnings.
The pod form factor or pay as you go model in the pharmacy and our experience developing exceptionally simple products position us uniquely to grow Todd use among type to users.
While we prepare for Omnipod five submission and commercial launch we are also making progress on our future products.
We are advancing our collaborations with Dexcom and Abbott, who are rapidly and meaningfully raising awareness of diabetes technology among type one and type two users.
CGM is helping users recognize that they need better insulin delivery solution and CGM adoption is paving the way for generations of Omnipod products to meet these needs.
In addition to integration with our next generation sensors, we have exciting work underway to make omnipod five compatible with iOS.
And we continue to advance our algorithm to expand our lead and simplicity and ease of use.
Now turning to our progress in our international markets, we have seen a gradual recovery in our European markets and in September we announced the full commercial rollout of Omnipod dash.
Our teams have done a remarkable job preparing our markets to support this launch and our customers are loving the product now 100% of our new customers in Europe start on Omnipod dash.
In September we announced the start of our geographic expansion efforts and we are on track to enter five new markets by early 2021.
We're taking a deliberate approach to our international expansion as we build our capabilities in each market and leverage our existing teams and strong distributor relationships.
While it will take time to broaden our presence over the longer term our expanded global footprint will significantly increase our total addressable market.
Finally, turning to operational excellence in order to meet the growing demand for Omnipod, we are increasing capacity in both the United States and China, we're making considerable progress with the ramp of our first two highly automated U.S. manufacturing lines and we are.
Nearing completion of our third line installation, which we expect will produce sellable product next year.
We have also made an investment in another contract manufacturer in China, allowing us to leverage our local supplier base and highly experienced team to quickly scale.
These investments strengthen our global manufacturing and supply chain operations and ensure that over the long term, we have the capacity and redundancy to meet increased global demand for our products.
In summary, the world remains challenged with the impact of the global pandemic. However, the compelling benefits of Omnipod, the uniqueness and durability of our recurring revenue model and the outstanding execution of our team provides significant insulation for insulet.
We delivered strong financial and operational performance and we are taking the appropriate steps to expand our innovation pipeline grow our addressable market and enhance our global manufacturing capabilities.
Our team is focused on finishing the year strong and sustaining our momentum as we move toward launch of Omnipod five in the first half of 2021.
And most importantly, we remain focused on improving the lives of people living with diabetes I will now turn the call over to Wade.
Thanks, Shacey, our third quarter marked the continuation of our strong performance as we once again delivered double digit revenue growth, including record quarterly revenue for our diabetes product. Once we've maintained a solid track record of performance largely due to our loyal customers and the committee.
It's an execution of our global Insulet team.
We are steadily advancing our strategic imperatives and delivering on our mission to improve the lives of people with diabetes.
Turning to the third quarter financial results, we delivered 20% revenue growth.
All of our expectations and 9 million above our guidance range total.
Total omnipod growth was 18%, which was the major driver of our outperformance at 6 million above our guidance range.
Drug delivery revenue also finished ahead of our expectations with growth of 47%, which was $3 million above our guidance range.
And our total Omnipod business. The pandemic was a smaller headwind than expected it negatively impacted global new customer starts in both the second and third quarters. This creates a compounding impact on our revenue, which we began to see in the third quarter and we'll continue to see an impact into the fourth quarter and.
First half of 2021.
Despite this headwind and there was as a result of our year to date strong results and continued execution. We now expect full year 2020, total omnipod revenue growth to exceed our start of the year pre coated expectations.
In Q3, we exceeded our guidance for new customer starts.
We expected the pandemic would lower our beginning of the year expectations by 30% to 50%.
Results were favorable in both the U.S. and international regions with a combined impact slightly less than 30%.
Additionally, both the us and international had significant sequential improvements, resulting in approximately half of the impact in Q3 versus Q2.
Attrition and utilization for total Omnipod were stable sequentially.
Looking by product line Us Omnipod revenue grew 21% exceeding our guidance range of 14% to 16% Q3 revenue included a headwind of an approximate 4 million decrease in distributor channel inventory levels, partially offsetting estimated channel.
And to rebuild in the first half of the year, mainly due to the pandemic.
Our strong growth was driven by further expansion of our customer base increased omnipod dash adoption and the mix benefit from the shift to the pharmacy channel, including a premium on dash, where we provide the PBM to customers at no charge.
In the third quarter Omnipod dash drove approximately 65% of our U.S. new customer starts and we grew volume through the pharmacy channel to over 30% of our total us volume.
International Omnipod revenue grew 12% compared to our guidance range of 9% to 11% primarily due to better than expected new customer starts channel inventory growth in the quarter of an estimated 4 million to 5 million was primarily driven by stocking shipments.
Omnipod Dash and was similar to the amount of estimated increase distributor orders we experienced in Q3 2019.
Drug delivery revenue increased 47% compared to our guidance range of 23% to 28%.
Similar to Q2, the Overachievement was due to our partners increased forecast related to the current environment.
Turning to gross margin, we delivered 65% up 80 basis points exceeding our expectations.
The drivers of our gross margin expansion included improving performance of our us manufacturing as we ramp our newly implemented automated lines as well as a favorable revenue mix from the shift to higher volume through the pharmacy channel.
Also contributing was favorable product line mix.
While positive foreign exchange was a 60 basis point tailwind it was offset by a 60 basis point headwind from onetime coded related costs of $1.1 million.
Operating expenses in the third quarter were largely in line with our expectations on a dollar basis and slightly lower as a percentage of revenue given our strong topline performance expenses increased on a dollar basis, primarily due to the marketing costs as well as R&D and clinical spend for Omnipod five.
Adjusted EBITDA as a percentage of revenue was 18.1% in the third quarter up from 15.4% in the prior year, our profitability improvement benefited from operations with improved gross margins and operating expense leverage and the change in other income.
Turning to cash and liquidity, we remain in a strong position with our earliest debt maturing in 2024 and low cash interest expense. We ended the third quarter with 897 million in cash and investments.
Subsequent to Q3, we raised an additional $130 million of cash related to building and equipment financings as these type of arrangements helped to reduce our overall cost of capital.
The additional cash further strengthens our position and allows us to continue to invest in our strategic imperatives. Our investments are primarily to scale manufacturing and supply chain operations capacity as well as for R&D programs Global commercial and sales force expansion and international product and geographic expansion.
Jim.
We are uniquely positioned to drive rapid growth by serving a large and underpenetrated market and our strong cash position provides us with capital to further strengthen our foundation for long term sustainable growth.
Now turning to our revised outlook for 2020.
As a result of third quarter revenue that exceeded expectations, we're raising our total company full year 2020 revenue guidance to growth of 20% to 21% up from our previous expectations of 17% to 19% and above our beginning of year SK.
But.
This includes raising total omnipod revenue to a range of 21% to 22%. Our total omnipod growth rates are now back in line with our original guidance set at the start of the year pre coded which is a testament to the resilience of our durable annuity model and the execution of our.
Insulet team.
By product line for Us Omnipod, we are raising our expected revenue growth to 23% to 24% and for international Omnipod, we are raising our expectations to 18% to 19%.
Although cobot continues to create uncertainties and it is difficult to predict the progression of the pandemic or the probability of a resurgence. We now expect the global new customer starts for the full year of 2020 will improve to approximately 75% of our beginning of the year estimate.
Despite the challenging environment, our global diabetes business remains well positioned to generate strong growth this year as well as in 2021 and beyond.
Lastly for drug delivery, we are updating our expected revenue growth to 4% to 6%, resulting from the increased forecast from our business partner.
Turning to the rest of the PML as a result of our outperformance in the third quarter and stronger revenue outlook. We are raising our full year 2020 gross margin guidance to approximately 64% up from approximately 63%. This includes the headwind of 9 million to $10 million or.
Approximately 100 basis points of estimated one time costs related to cope with safety and mitigation efforts versus our prior guide of 7 million to $10 million.
We now expect 2020 capital expenditures will be below prior year levels due to projects coming in favorable to estimated spend and due to timing.
Our long term financial strategy and capital deployment plans remain unchanged and we therefore expect capital expenditures to grow again next year to support scaling manufacturing and supply chain operations capacity as well as advancements in our innovation pipeline and commercial and international expansion.
For full year 2020, adjusted EBITDA as a percentage of revenue we continue to expect to come in at the low end of our previously stated 13% to 17% range.
Turning to fourth quarter 2020 guidance, we now expect total company revenue growth of 7% to 11%. This includes total omnipod revenue growth of 10% to 14%, which as a reminder reflects the compounding of lower new customer starts from the prior to.
[music] quarters related to the pandemic.
By product line, we expect us and international Omnipod revenue each to grow 10% to 14%.
And drug delivery to declined 17% to 23%.
In terms of new customers, we now expect global new customer starts to improve in the fourth quarter to a range of 15% to 25% less than our beginning of the year expectations. This compares to the 25% in fact, we guided to on our Q1 and Q2 calls.
In conclusion, we achieved strong growth year to date, despite the impact from the global pandemic. This speaks to the power of our differentiated market position through.
Through product innovation and durable recurring revenue model, our innovation pipeline is strong and our financial position is sound. We are focused on finishing the year strong and building momentum as we enter 2021.
Assuming market conditions stabilize next year, we remain on track to deliver our 2021 targets of $1 billion in revenue gross margin in the range of 67% to 70% and operating income as a percentage of revenue at the low end of mid teens with that we'll turn the call over to the operator for Q.
I want to.
Thank you.
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Our first question comes from the line of Margaret Capstar from William Blair. Please go ahead.
Hi, everyone. This is Brandon on for Margaret Thanks for taking the question.
First if I could just.
Yes on the Q4 guide can you just talk about what kind of maybe Tobin headwinds are baked into that we've obviously seen a lot of resurgence.
Tobey globally.
So our does that kind of bacon things getting worse or does it kind of assume that things stay the same as we go through the fourth quarter.
Hey, Brian its way that concerned with that one and it's a good place to start actually because this is obviously a major driver in the business today, and it's really different in the U.S. and international as you said, so if we talked about the U.S. first we've been performing quite well in the U.S. and new customer starts have been below our beginning of year.
Our expectations in Q2, and Q3, but we've been building momentum in the business in Q4 is going to be pretty close.
For Q4 in the prior year and just a reminder, Q4 in the prior year was our all time highest new customer starts and so we get a really tough comp in Q4, but in the US the momentum has been bit been building, we've got a lot of things driving that momentum.
Dash is still a primary driver for us the move in the type two is still early the pharmacy model would pay as you go is working well we've made investments in our commercial business and expanding the sales force and then our teams have done a great job ramping the virtual training. So theres just a lot of positives that are somewhat offsetting that.
As headwinds from new customer starts and as a result, we still got double digit growth in our guidance and so for the US it's going to be pretty close if we can get to the high end of our guide or even above the new customer starts and we pretty strong for us in Q4.
From an international standpoint, it's a different story the recovery has been slower and as you mentioned, we've seen recently a few countries going more back into a lockdown and so in speaking with our field teams. There. They do anticipate it's going to be more challenging, but what's different than Q2. When this really caught everybody by surprise is ours.
Teams are much more effective now it's still staying in contact with their customers finding ways to connect with them and dash is a great just great timing for us to be launching dash because it gives our teams an opportunity to still get those meetings with physicians and with customers and so we do think that.
New customer starts will continue to be more of a headwind above you were at the high end of this range for us, but our teams are doing a better job and there is lots of momentum I mentioned dash newly launched internationally, but we've made salesforce expansion there and we're also expanding into new countries and so there is a lot of momentum building in behind.
This pandemic.
And so I think we're going to continue to do that but at the end of the day the.
The anticipated headwinds to the extent, we can I mean, it's obviously very difficult to predict how much impact depending on when we will have but we've built the assumption into the high end and low end of our guidance ranges and just depending on how impactful. It is it should lantus in the range, if we see something like Q2 again.
It was pretty extreme and I think that would be something that will probably push us out of the range.
Great that's really helpful color.
And the last one for me.
I appreciate it it's probably too early to get into specific numbers for 2021, but maybe what might be helpful is that just kind of.
How are you thinking about 21 internally about what kind of coated catalyst whether it be a vaccine whether a widespread available vaccine what kinds of.
Catalysts are you looking forward to kind of get back to normal pre tobin levels and on the same token.
Does toby potentially slow the rollout of Omnipod side, given that that maybe needs a little bit more hands on training given its the closed loop.
Or perhaps that's that's an incorrect assumption thanks.
Sure. Thanks, Brendan for the question and I think what we had said at the beginning of this year is that we did expect.
To see continued improvement throughout the year and then we were hoping for normalization in 2021, I don't want to sort of predict what's going to happen in 2021, but I think it's great to see our where we are now predicting to close this year because it. It means were ahead of what we expected in terms of the potential impact.
Act of co bed, and regardless of what happens to the vaccine and the macro environment. Our teams are getting great at and.
Managing and making an impact in this environment and that's because of some of the things that we just mentioned our virtual training tools and various capabilities that we've built.
Good Omnipod five you know that is a product that we have spent so much design work and thinking and organizational and focus on on simplicity and ensuring that everything from the onboarding experience through to add the user experience of the system is simple and it is.
Designed to be a product that it's simple enough at MD I users and kids can easily get onto and be successful with so I don't anticipate that Ams cobot is going to slow us down there is just incredible enthusiasm in the market and internally with all of us to get that product onto the market and we're going to make that happen.
So what's happening in the macro environment. Thank you.
Thank you.
Thank you.
Our next question comes from the line of Matthew O'brien from Piper Sandler. Please go ahead.
Good afternoon, everyone. This is Patrick on for Matt. Thank you. Thank you so much for taking the questions I just wanted to follow up just a little bit on the Colgate environment you implemented your financial Assistant program April can you give us a sense for participation within that program and I know it runs till December of this.
Here, but and some people may have roll off their Cobra insurer.
Insurance plan do you envision the.
This dynamic.
Further the utilization of that program or any color there would be really appreciated. Thank you.
Sure, Patrick and I'll ask way to get a little bit more color on utilization of the program but.
At a high level I will say that it's something that I think we as a company are very proud of and that we were out front and able to offer this assistance to our users.
It is very much about ensuring that while cobot is negatively impacting in an outsized fashion our partners that they can remain on product and so we're proud of the program in our intent is to.
We are committed to the end of this year, if we feel like that need may persist then we will certainly evaluate a continuing the program.
Yes, and on the numbers Patrick they've been quite small actually I think you mentioned Cobra, but there has been many other options for people.
In including.
Medicaid and the states or alternative.
Insurance in the household so we havent seen that many people on the program, but having said that we've always had financial assistance program and we've had several quite a few people on that over the years and so this is really an enhancement to that program and we havent met the number of people that we had in our original program yet so it's.
Not like it's been a significant pickup at this point, but as Shacey said, we're really happy happy to have it in place. If we have current customers that can't afford the product given the current situation that we're in we're more than happy to backstop them and help them continue with the therapy until they can.
Access it through normal channels again.
So thats really helpful color guys. Thank you for that and my quick follow up.
I'd love to hear more about DTC campaign efforts that you're making I know you started a limited national DTC that seems to be doing well and you'll have more KPI to kind of gauge how successful that program is but how should we think about the DTC efforts into next year with some of the the cobot impact still kind of percolating omnipod five.
Coming out like how are you thinking about the broader rollout for that DTC campaign as you round the corner of $20 to 21, and thanks for taking the questions again.
Sure Patrick It's funny you are asking the questions that we're asking ourselves and turn on any one of the reasons why we wanted to do DTC. This year before launching Omnipod side is that we really wanted to learn about the impact learn about the.
The messaging that's most effective channels that are most effective we've been expanding our DTC over the last couple of years through digital channels, but this is the first time that we've really stuck our toe into television and it's clear from the early on you know the early numbers that we've made an impact on awareness. It certainly is.
Is driving increased awareness and what were looking at now is just on how does that awareness convert into actually actual customers over what period of time and to what degree and then are those customers because remember we have eliminated all barriers to getting on the product the patient can get on to Omnipod in the pharmacy without.
Any upfront cost and basically for it with a free trial and so we want to make sure that those patients stay on the product and to the extent that our customer base does so those are the things that we're evaluating before we determine to what extent, we increase our investment in DTC in 2021, and our plan is to give a bit more.
Color on the next call when we're laying out.
And we should have learned more by that and have a better point of view in terms of.
Expanding.
But I think what's exciting is that now that we have the position that we have in the pharmacy channel and we actually have the scale and the position to kind of support increased demand and so that is a really exciting to us in.
In the DMC channel getting patients through the process and on to the product is a bit more cumbersome and after patients to be able to walk into the pharmacy get the product have no upfront cost and how that sort of easy on boarding experience.
Right time to start to learn more about DTC and were encouraged and stay.
Stay tuned.
Thank you.
I show. Our next question comes from the line of Robbie Marcus from JP Morgan. Please go ahead.
Great.
Thats on a really good quarter.
I have two questions first.
Shacey I was hoping you could give us your thoughts on.
On the status of new patients and where they're coming from Im sure a lot of its dash Im sure a lot of fits the form factor at the lower out of pocket, but how should we think about.
When you have horizon five one of your competitors with an integrated solution is.
Outpacing you in terms of new patient growth and a lot of it has to do with the hey, I'd solution. So how should we think about as we set our models benefit from dash, but also the benefit that's coming once you have a competitive I'd solution.
Yeah, I think those are great questions and I think really highlight why we are so excited about omnipod five you see the growth that we're driving Wade said in Q4 and the U.S., we could be back to a wreck all time record quarter at the high end of our guidance for new patients. So we're seeing a great recovery that recovery is being driven on.
As it frankly always has and often omnipod form factor, 80% of new users are coming from and so we continue to grow the overall market and that's being driven by Omnipod form factor by pharmacy access in both type one and type two empty I users that is a population that is just very.
Attracted to dash and its simplicity I think we'll continue to see that segment adopt omnipod basis form factor and based on.
The out of pocket economics actually in a in the pharmacy channel.
The vast majority of our patients are accessing omnipod for less than a 50 dollar co pay so it's very economic it's very attractive in terms of form factor and the access channel. So those are driving on demand today I think what you're highlighting is why we can't.
We are so excited about adding about five is that you can really see the power of integration with the dexcom sensor any I'd and up until and.
The next few months when we get or the next several months when we get Omnipod five out into the market patients have had to choose between what we know is a preferred form factor and integration with the dexcom sensor and obviously.
In the first half of 2021 will no longer have to choose and so I am not going to make predictions on exactly how that's going to change our trends I think.
We certainly expect it to be an accelerator and I think the question is what changes in terms of MDR users coming onto the product or do we see more pump users coming on to the product because remember they can adopt omnipod five without an upfront cost and without a four year lock in period and so we're really excited to basically.
Check every box that patients are looking for in terms of insulin delivery system and an ERP system in particular with omni path.
Great and maybe one for Wade.
Wade you clearly demonstrated a conservative approach to guidance since you've come in as CFO, and particularly I'd say, a very conservative stance to guidance during cope at 19 and I understand with good reason all the unpredictability, especially.
The case is starting to rise again you.
No I think I asked you. This last question and you far out seated your your guidance range.
I'm going to ask again on this call can you help us understand some of the underlying metrics that get you to a range that I would say people would say seems fairly conservative is there large de stocking that we should think about are you willing to give us may be what volume versus mix.
Price was in third quarter and is that going to be materially different in fourth quarter just trying to.
Get a sense of some of the underlying trends here and you know how.
How much of it is conservatism versus.
Just just a downward move in the numbers. Thanks.
Hey, Robby.
First of all I'm glad you brought up guidance because.
We're very happy that we chose to issue guidance back in Q2 at the front end of this pandemic was a big decision, but when we looked at the recurring revenue model that we're in and how that really differ.
Defense against a one quarter impact like like the pandemic happen in Q2 and that we were going to see a potential new customer starts.
Impacting us for a few quarters it compounds and so that.
Yes, its really math and it's our new customer starts over a few quarters. The compound Q4 ends up with three quarters, including Q2, which was the lowest in it. So that's why we have them bigger headwind in new customer search in Q4 than we've seen.
The comments on conservatism I mean, I'll take that every time, because we held guidance and we did it because we wanted to make sure people understood our business model and that we could articulate our business by putting stakes in the ground and adding additional metrics. So we could talk to it.
The major drivers of our business like you said are mostly volume and.
Our business is very much a volume business now.
As we sell through the pharmacy we.
We started to get into more and more distribution channels. There will be other ways for people to access our product overtime, so definitely becomes a volume business and so for us.
Plays an important component today as it moves as we move customers from our traditional DMEA indirect channels into the pharmacy and the premium that we get for the pay as you go model because we're giving the pdm for no charge those are dynamics today, but they are far outweighed by the volume increases in the business.
Got it appreciate it and just one very quick clarification are there any major conferences to present the pivotal data now that HGTV has been postponed or should we expect it in the label. Thanks.
Yeah. Thanks, Robbie we are evaluating that we had a great forum with HGTV and our clinical investigators and being invited to share the data, but obviously we were just recently notified that its been delayed till may. So we're looking to see are there other appropriate forums for us to get it out there and you know theres just a lot of moving.
Pieces, we obviously the most important thing is that we get FDA clearance and get to launch in the first half of next year and so we don't want to get the data out ahead of that and maybe at Russell feathers at the FDA. So we're looking at our options and we certainly understand and we're enthusiastic to get out there as soon as possible, but I don't have specifics to provide today.
Thank you.
Actually my next question comes from the line of David Lewis from Morgan Stanley. Please go ahead.
Good afternoon, thanks for taking the questions here wait I wonder if.
Next year is an interesting year, when we think about omnipod five launching certain margin considerations that you've talked about a fair amount. This year and then of course, Covidien patching, new patient starts which could sort of bleed into early part of 2021 is there anything sort of high level, we should be thinking about as we think about the models.
Models next year in terms of new patient starts margins mix of business any considerations at all that could be helpful. As we think about 21 modeling.
Yes, I think you just checked off the major ones David and.
Well, let's start with Cove. It because this is one of the ones it's harder to predict for US. We've got this progression we've seen significant improvement from Q2 into Q3, we're expecting a pretty big step up in the U.S. snow at the high end of our guidance. We're only a few percentage points off our beginning of year estimate and that.
It was pretty strong estimates so were anticipating pretty strong recovery in the us if we get there than it really is about how does that impact us in 2021, and that's the unknown and we'll obviously know more after we get through Q4, and we're set up to give our 2021 guide we always give our guide at our Q.
For call and so we'll have a much better feel I think for at least the early part of 2021 will look like in the us outside the U.S. International we're seeing more and more lockdowns already here in the quarter and so that's.
We're so far we feel comfortable we will be in the range that we provided for Q4 for international but again next year. It makes it a much more challenging thing so with Cove. It obviously, that's a question mark.
For the other drivers that you mentioned Omnipod five that one comes first half for the year will be our limited market release, and so we won't see a material impact until the second half of the year. So from a modeling standpoint to your question David I would think about Omnipod five starting to ramp in the second half of the year gross margins, we were very happy.
The report just under 65% and.
I think we can think about the same for Q4 and that really sets us up for the 67 to 70 next year, we do have a lot of programs going.
We announced recently that we've stood up another third party manufacturing plant in China, and so we're working our first two lines there to get Sellable product since we've got a lot of things happening inside of that gross margin number but they are all designed to get us set up so that we can signal significantly increased capacity on a short term but.
Yes, if we need to and at the same time, we're ramping up the U.S. So I think we're squarely in that 67% to 70% range for next year.
It depends.
Depending on the volume and depending on how fast we ramp we could be at the low end, where we could just as easily be at the high end and so I think from a modeling standpoint.
Gross margin is just right in that 67 to 70 range.
From a mix standpoint, we will continue to see the mix benefit in the U.S. from the pharmacy channel, we're not done moving customers from the DMV and direct side of the business into the pharmacy and ramping up dash. The one thing that's still a question Mark for US there is what will be pricing omnipod five that and whether we will have a.
Premium price or price parity there. So there's a few open questions that we'll look to clarify when we get to our earnings are premier guidance in our Q4 call.
Okay Super helpful. Just one more on it for you and then a quick conversation.
The third quarter momentum slow down in the U.S. I'm sort of assuming because you guided to momentum slowed in the fourth quarter that just reflects probably the peak of new patient start impact in the third quarter and this kind of no change in underlying U.S. fundamentals and then just for Shacey as I think about Omnipod five next year in some of the different things you talked about these last couple of calls.
So you always talk about MD I.
You talked about the type one as well as you think about the impact on the five and the market next year is it much more about for you type on conversions type one share which has not been necessarily significant driver the business. What do you think it actually accelerates.
MD I conversion part of the business I am just kind of curious which has the most are the more underappreciated opportunity between the two.
Thanks, so much.
Sure. So we can start the <unk>.
On the sequential growth that you mentioned, David and you're right you can see it in our growth rates Q2 is the problem quarter I mean that was a quarter, where we had significantly lower new customer starts. So we're going to live with that for four quarters and that's the big one that we will annualize out of the business in Q1 next year and adding.
New customer start from Q2 into three and four so I think for obviously has three quarters of compounded impact to it and that's factored into our guidance.
But thats why I wanted to just sheer and give perspective on all the momentum we have building inside the business because there's so much good things happening and really our goal here is to come out of the other side of the pandemic with as much momentum as we can around our new product innovations around our business model strategies with type two.
Two and pharmacy as well as the investments we've made in the sales force in the commercial business and including virtual training as well as Shacey mentioned the.
End to end customer process and so there's just so many good things that this compounding new customer starts is.
Is offsetting for us and so it's really our job to build the momentum here come out the other side stronger is Q4 going to be the trough I don't know yet we have to see what the pandemic impact is in Q4, and then what Q1 looks like but we really don't annualize out that tough Q2 until we get to Q1 next year.
And David on your question on the pad five I think it's a great question and then one were looking forward to sort of seeing the answer in 2021, I am I guess I get most excited about at the end users that are converting because if you think about what's happening today nobody chooses at least our data would indicate that noble.
Chooses a tube pump because it has tubes, they choose it and over omnipod when they do because it has a dexcom integration and so when we add check that box and we obviously believe omnipod five will be significantly differentiated significantly easier to use.
And we think about key features like phone control like constant access to data and all the other things that spoken about when we check that box and we should get a much larger percentage already today, we get a very large percent of MB I conversions, we should get a much larger one so that to me is probably the biggest opportunity because if you think about the.
No.
Capital equipment model some of those folks most of those folks are locked into a four year contract and so 25% of them will come up and I think it will be interesting to see in that population what happens in terms of adoption from pad five but thats an area, where we're a little we're a little less familiar.
Familiar with because we get less patients from that area today, what we know for sure is that employees are going to be very very attracted to omnipod five and when we checked the box of integration and automation with Dexcom, that's going to be a very differentiated and appealing product.
Thank you.
I show. Our next question comes from the line of Larry Biegelsen from Wells Fargo. Please go ahead.
Thanks, guys. Thanks for taking the question one on international one on of course Omnipod five so in the past I think you guys have talked about international growth being in the high teens low 20% range.
Is that is that still intact.
Which new marketing planning to launch it in 2021, I heard five new markets in the prepared remarks.
Far behind is.
The PUC five outside.
Outside the <unk> as compared to the U.S. and I had one follow up.
Great and maybe I'll ask way to give a little bit of insight into the overall expectations for international growth. There's nothing fundamental in the business that would change our long term expectations for that business. It's just simply that we're in the midst of a pandemic and that theres been a slower recovery in particularly your.
Yep than other parts of the world and particularly the United States. So we remain very bullish on our expansion strategy over the long term and it's why I mentioned in my remarks that we're really starting in earnest our expansion in early 2021 in overtime. This adds significant addressable market to us over.
In the coming years, we didn't give the five markets. So we'll lay those out for you as we enter into them. We did get one checked off the box.
This quarter in Belgium, so actually one of the five we just entered.
And we will let you know as we enter these markets that those launches have occurred.
And then I would also ask Larry about Omnipod five in international we Havent given a timeline on that yet just to let everybody know that that work is underway and we are fully committed to bringing omnipod five to our European markets and to all of our international markets.
Thank you Ben on the Omnipod five.
Guys typically announce when you have filed or submitted.
Something like that and is there any reason why the pivotal omnipod five data would look.
A much different from the pre pivotal data we saw at 88. This year for example.
Larger number of centers.
Anything that you know we should be aware of that would make that data. The pivotal data look meaningfully different from the pre pivotal data that we should be aware of thanks for taking the questions.
Sure. Thanks, Larry and we don't our practice is not to and notify our become public when we submit we simply share the news when were cleared so thats our general practice I in terms of the data I really don't have much insight to offer there we don't want to preview. It obviously the pre pivotal data looked very very strong and we are very.
We're excited to get the Omnipod pivotal data out there, but I don't want to give insight into just how it compares at this point.
Understood. Thank you.
Thanks, Larry.
Thank you. Our next question comes from the line of Jeff Johnson from Baird. Please go ahead.
Thank you good afternoon guys.
Maybe just a couple of clarifying questions way, Doug you mentioned Omnipod five pricing and thoughts on a premium potentially for next year I thought that was kind of settled at this point that you probably were going to go after access more than pricing.
Just to try to get it out there faster.
More broadly across accounts and that's just is there is there a reconsideration happening that maybe you could get a premium for all five or how to think about that.
Yes, it's still a question for us Jeff.
Sure.
There's a lot of different opportunities for us across.
The U.S. in particular.
But like you said a major consideration for us is getting us out to our customers as fast as possible and we certainly take into consideration the current environment that we're in.
Other add these systems that are in the marketplace and we also know that there is a significant opportunity for us to get there faster.
Having said that even if we go at parity pricing.
There is a long process to work through and we've put the infrastructure in place or we've built up our access teams, we built up our wholesalers and distributors and we've learned a lot through the ramp up of dash and so it really is still a question for us Joe.
It really just depends on how we want to approach the market lots of benefits, obviously to pricing at a premium but there are just as many benefits in a very compelling one from a customer standpoint to get it into into the hands of our current customers and new customers. So yes that one is still a jump off for us.
Okay, Great and just maybe the follow up then is.
This cumulative math that we talked to a lot of investors about and it seems to confuse them at times and.
The way you guide to.
New patient starts relative to your your pre cobot expectation when I put all that in the blender and it does seem to create maybe a little confusion you don't very simplistically in the Threeq Q, what I take kind of all the data points you are providing it seems to me or new patient starts in the U.S., we're probably close to on par with what they were last year in the Threeq deal which was.
Pretty good quarter, obviously for Q 19 was even stronger but threeq 19. It seems like your U.S., new patient starts almost at parity with last year and on an absolute basis. Okay.
Yes, maybe down marginally five or 10% year over year, but not.
Dramatically down is that a fair way to be thinking about what they were on an absolute basis in the quarter itself.
Yes, you're right. It is challenging and I'll just highlight again. This is one of the reasons why we wanted to provide guidance so give us an opportunity to share more about it and to provide enough data points in sounds like Jeff you're close what I would say is the U.S. was a little stronger headwind than you laid out there but Q.
Four is going to be getting pretty close against a really tough comp in Q4.
The U.S. business has been performing really well and despite the headwind it's been on the low end of our overstated new customer starts headwind.
Then internationally, a little higher again than the estimates you put out there those are a little lower than we're experiencing from our estimates and.
And we do expect international to persist more into Q4.
Thank you.
Sure. Our next question comes from the line of Joanne wish from Citibank. Please go ahead.
Good evening and thank you for taking the questions just put them all upfront.
What is the size of the two to six year old population that you are looking to go after with that incremental study and then I'm trying to get my head around how Omnipod five ramps next year. We've heard limited launch we've heard full launch, but you've got a very successful dash product that's already out there and so I'm trying to just if you could walk us through any.
Milestones or milepost, we should think about thanks.
Sure Joanne I don't have the total population of two to six year olds in the market. It's obviously, a really important population for us.
Not necessarily because of the size of the population, but because we know that when people adopt omnipod. They stay with us. So we've always been strategically focused on on the young pediatric population and it's also a population where omnipod is heavily heavily differentiated.
For a variety of reasons.
It's just a much easier.
Technology to use on young active children, so and so we're excited about getting everybody enrolled in our clinical trial and getting that label expansion ideally before the end of next year in terms of milestones for Omnipod five.
We.
There is a tremendous amount of activity going on in the company as we think about ramping towards the Omnipod launch. It we have obviously the clinical data analysis and presentation and publication of the data so that will be a milestone as we move forward.
I see and commercial work going on to look at time, establishing our.
Easy Onboarding systems for Omnipod five we have market access work. So obviously, we will start to build on reimbursement in the pharmacy channel for Omnipod five and then we have a ton of work going on in medical Affairs et cetera, and then of course, we have a cross functional team working on the submission which is going to be somewhere around.
30 to 40000 pages. So every almost every.
Individually individual function in the company is touching the army top five launch in some way.
So lots of milestones happening internally in terms of our commercial progress our manufacturing progress in our clinical progress. The next thing that will really I announced is probably the data and then the clearance of the system and so that's those are the things to look for kind of publicly externally and you mentioned is it a limited market release is it a full market release we.
I've always maintained that we will do a limited market release, and it's a high stakes product for US we know it's the most anticipated innovation in the pipeline about diabetes products and so we want to get it right and a limited market release as part of doing that so when we add launch in the first half of 2021, we will launch into a limited market release how.
Long that will be I think remains to be seen because it depends upon when we're meeting our endpoints and our objectives for our limited market release and that will be based on market access manufacturing ramp and customer feedback.
Thank you so much.
Sure. Thanks.
Thank you. Our next question comes from the line of Ryan Blicker from Cowen. Please go ahead.
Hi, Thanks for sneaking me in Paul maybe starting with the pharmacy channel transition you noted greater than 30% of your volume is going to the pharmacy, which is similar to last quarter.
65% of new us as to the pharmacy. So the long term outlook remains clear, but can you provide any additional color on why the piece of quarterly increase since were total us volume for the pharmacy has slowed a bit over the past couple of quarters and then looking to 2021 do you believe the Omnipod five launch will be a catalyst to convert a large portion of your existing installed base to the farm.
Okay.
Thanks, Brian and maybe I'll, let that we talk about the specific numbers in terms of the pharmacy channel, but I would say that momentum is very strong in the pharmacy channel access continues to increase and we do expect that omnipod five should be a catalyst in terms of pharmacy conversions because it it really is going to be a pharmacy product and.
So at that we are committed to we are committed to the pay as you go model and we know there is a lot of demand building for the technology.
Right, you're correct our guidance at greater than 30% and just to clarify it is growing a couple percentage points in our in our number we just are keeping it rounded so.
As the quarters go quarter to quarter, we're probably not going to see major step ups, just given that our overall business grows as well.
But as Shacey said the majority of our new customer starts are on dash and dashes, primarily in the pharmacy. So we will continue to see the pharmacy volume grew over time.
That's great and then if I could ask a two part follow up on the on the type two opportunity.
You talked again about ramping CGM penetration in the type two patient population, which clearly bodes well for pump penetration over time, just wondering thus far in 2020 have you seen any evidence of pump penetration increasing among that type two patient population or do you believe the increase in your type two mix is being more driven by share gains of new patients and then.
Knowledge, it's really early I'd be curious to know the patient mix of leads generated by your DTC program, and whether or not it's driving a disproportionate level of interest among guidance. Thank.
Thank you.
Hi, Thanks, Ryan, Yes, so in terms of overall pump utilization and type twos is still pretty low penetration and there's just a massive opportunity to go get with that type twos, we see CGM as sort of a beach head right as CGM adoption happens, which is happening is very mature.
Really happening and in type one, but just really.
Getting going in type two and we see that as a trend that Ben as you said bodes well for pump adoption and other pumps are challenged from an access perspective. So we're very fortunate to be in the pharmacy channel providing the pay as you go model and those that's really what's driving.
Access and availability of Omnipod to the type two population. So we know we've got a really appealing product we know that the technology adoption curve for CGM is helping to drive this but we are in a unique position in terms of our channel and in terms of our form factor and Omnipod disc.
Fresh and ease of use to be able to win in that market and so I think we are winning I know, we are winning primarily with MD I conversions not other pumps and I would be surprised if other pumps are seeing the level of conversion that we're seeing and type twos.
And now we are testing a bunch of different messages in DTC. So we do have actually messaging that is geared towards the type two population too early at this point to be able to give a color on that but as I said as we lay out our expectations for 2021, we'll be able to give.
Insight into DTC, and what we expect that that's going to drive for us.
Thank you.
Actually our next question comes from the line of Travis Steed from Bank of America. Please go ahead hi.
Hi, Thanks and question.
Yes.
That's all.
So the.
Again already so what do you hope to gain from that.
Sneak that floor, yet it will be more.
Reimbursing regard thanks.
A lot of Omnipod approval.
But after this estimate yes, Travis I'm, sorry, you broke up there. So we didnt fully you were a little garbled. There was some interference if you could repeat your question would be great.
So the question was up.
Thanks to his abilities.
About gain from it in the bathroom, FDA approval or or reimbursement coverage.
Got it okay, great Omnipod five type two feasibility study I'm. So that is the first step in terms of our clinical exploration for tight cues on Omnipod. Five you may remember, we did feasibility studies for type one with Omnipod five as well at this really is a step in the eventual label expansion and.
And it's an early stop so we will get 30 to 40 users on the product and we will look to see does the algorithm perform as we would expect it to for the segment or do we need to tweak the algorithm remember when we did our early feasibility studies with Omnipod five on in the type one population we did a lot of work on the algorithm.
Tremendous amount of work on the algorithm to deliver the performance that we saw in the pre pivotals.
Remember, we had best in class Hypoglycemia, we had great timing range, particularly with kids that came from just a lot of tweaking of the algorithm and so we may need to do the same thing in the type two population. It remains to be seen. So this feasibility study will give us those learnings will then map out for us how much clinical work do we have.
And then we'll be able to determine.
Determine what's the path for label expansion in terms of reimbursement we're fortunate on in the pharmacy channel and there really isn't a distinction between the type one and type two user and so with label expansion that should pave the way for access in the pharmacy channel four I'd like to.
That's great and one quick question on as.
As you look through like the early October the last few weeks as cases spiked and in certain geographies is there anything to call out that's different.
In those geographies just kind of curious how well prepared the doctors offices and patients are now versus how they were earlier this year.
Yeah, Yeah, I think it's a it's a good point and we I mentioned in the U.S. everything is getting more efficient and more effective working in this environment. So of course, we've talked a lot about the virtual tools for training and support that we rolled out we really have.
I have built a lot of confidence and preference among our clinicians and our patients.
For that pathway of training and so even as certain areas experience.
More.
Challenges with the pandemic, we're able to continue to bring new patients onto the product and and so in the USA as we've said, we're feeling pretty good right at the high end of our guidance in Q4 wouldn't indicate that we're going to be at a record quarter in Q4, So thats and thats great outside of the U.S., its a more fragmented and more challenged environment.
Right now and we still see that our virtual tools and the capabilities that we've built are certainly helping.
To ensure that we can continue to bring patients on but as we have on the UK hang back into a shelter in place at France and.
Those are a little bit more challenging environments for us in France. In particular is a large market for us. So it's not like it was in Q2, we certainly still see progression in terms of improve new patient starts outside of the U.S. and even in these more challenging markets, but there definitely is a headwind there that doesnt exist in the United States.
Thank you.
I show our last question comes from the line of Raj Denhoy from Jefferies. Please go ahead.
Hi, This is brianna barrage. Thank you for taking our question and I was hoping you could provide some detail on the mix of Cogs running through the OCTEON plant versus sources from flux in China, and then how does the new manufacturing contract in China play into that mix and then just a quick follow up on that would be.
What is the gross margin upside potential as more manufacturing shift in house and as the shift in automated manufacturing in the US the key driver to the high end of your long term gross margin target of 70% or are there other things going into that 70%.
I realize you've actually touched on a couple of key drivers. There. So the question is around mix on Cogs and the key for US today is active manufacturing is a more expensive product because it's fairly low volumes on two lines in a plant that's designed for for automated lines and a lot of the cost is.
Fixed on the automated manufacturing lines. So today, our production out of our flux, China facility is a lower cost than act and however overtime. Its design that the automated manufacturing lines will be more efficient and get us lower cost product and that is as you mentioned the single largest driver of IMTT.
Proved gross margins for us overtime, but in combination with that scale.
I think we are building significant critical mass in the business here as we accumulate more and more customers with our patch pump disposable design and the investments that we've been making in manufacturing both in the us and in China really build a critical mass of expertise and know how and how to do this and as we scale and bring more volume.
Intuit those volumes help us drive gross margins significantly as well and the new third party manufacturer in China is not an impact on our gross margins today. We've just got those two lines up and running and producing not producing sellable product, yet, but we do have them producing product and so those will start to factor into our.
Bugs either later this year or in early 2021.
Thank you.
Thank you.
Im showing no further questions at this time I would now like to turn the conference back to Chase the Petro Vic.
Thank you in closing I would like to acknowledge both national diabetes awareness month, and Insulates Twentyth anniversary since our Companys founding we've spent the last 20 years with a clear mission improve the lives of people with diabetes and over that time Weve brought advanced innovation to the diabetes community.
He and helped people spend more time living their best life and less time managing their chronic condition. So were very proud of all we've done and we're really excited about our innovations to come as we deliver on our mission. Thanks, all and have a great evening.
Ladies and gentlemen. This concludes today's conference call. Thank you for your participation and have a wonderful day you may all disconnect.
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