Q2 2022 Insulet Corp Earnings Call

Vince will begin shortly to raise your hand during Q&A you can dial star one one.

[music].

Good afternoon, ladies and gentlemen, and welcome to the Insulet Corporation's second quarter 2022 earnings Conference call. At this time all participants are in a listen only mode. Later, we will come back.

A question and answer session and instructions will follow at that time.

As a reminder, this conference call is being recorded.

I would now like to turn the conference over to your host Deborah Gordon Vice President of Investor Relations.

Thank you Joanna good afternoon, and thank you for joining us for Insulet second quarter 2022 earnings call with me today are Jim Hollingshead, President and Chief Executive Officer, and Wade Mcmillan Executive Vice President and Chief Financial Officer, Bret Christensen, Our executive Vice President and Chief Commercial Officer is also with.

US today for the Q&A portion of our call. Both the replay of this call and the press release discussing our 2022 second quarter results in 2022 guidance will be available on the Investor Relations 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 may be forward looking and could materially differ from current expectations. Please refer to the cautionary statements in our SEC filings for a detailed explanation of the inherent limitations of such statements.

And also discuss non-GAAP financial measures with respect to our performance, namely adjusted operating margin adjusted EBITDA and constant currency revenue, which is revenue growth. Excluding the effect of foreign exchange. These measures aligned with what management uses as supplemental measures in assessing our operating performance and we believe they are held.

Full to investors analysts and other interested parties as measures of our operating performance from period to period.

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

Thanks, Beth good afternoon, and thank you for joining us.

Im excited to be here with you today on my first earnings call as CEO of Insulet.

This past quarter, we exceeded our revenue expectations, resulting from sustained momentum across our business. We are halfway through the year and the entire Insulet team is executing at a high level, we increased our full year outlook for U S. Omnipod delivered record U S and global new customer starts at our second highest new customer starts quarter internationally.

And meaningfully advanced each of our strategic imperatives.

Accomplishing this was no easy task given the challenging global macro environment that we and other companies are facing.

We are incredibly excited to have recently entered full market release for Omnipod five and now our differentiated transformative technology is available broadly through retail pharmacies.

Results to date have been amazing.

<unk> five has proven to be the game changer, we thought it would be.

Customer and healthcare provider feedback has been overwhelmingly positive and our teams are doing a remarkable job executing the launch.

Our CE Mark submission review is progressing very well and we are in the final stretch toward approval.

This represents a key milestone in our plan to bring Omnipod five to people with diabetes around the world.

This approval is one step in our strategy to participate in the international market, which is being driven largely by CGM reimbursement.

We have also advanced our clinical efforts, our FDA submission for an expanded indication for Omnipod five in the U S down to age two is progressing very well and we are confident in our near term clearance.

The value of that Omnipod five can deliver to young children and their families is abundantly clear and we're thrilled to see them bring omnipod five to this highly vulnerable population.

We shared compelling data at Ada demonstrating have powerful omnipod five can be for the type two insulin requiring population.

A market segment that is further adopting omnipod due to our unique value proposition and in the type. One population. We are currently enrolling for a 200 patient three months randomized controlled trial in France, and the U S to demonstrate superior efficacy for Omnipod five compared to non AIB pumps and CGM alone.

Lastly, we broke ground at our future, Malaysia manufacturing facility, which will strengthen our global manufacturing capabilities and redundancy as well as support our international expansion strategy.

Before moving into a broader view of the quarter on our progress I want to take a step back and reflect on my first two months as CEO .

I was aware of the strength and commitment of the entire Insulet team from my three years on the board of directors.

Now that I'm CEO I'm, even more impressed our global teams are exceptional the shared commitment to our mission of improving the lives of people with diabetes is inspiring and it's pervasive throughout our organization.

Diabetes is a growing global epidemic and in <unk> ability to serve unmet needs and provide improved outcomes has never been more important.

It's clear that we have the team the product portfolio, the innovation roadmap and most importantly, the passion to improve millions of lives and I am excited and privileged to lead insulet on that journey.

Expanding access and awareness of keys to driving our business forward. Despite improvements over the last few years only a small percentage of people with type one diabetes globally benefit from insulin delivery technology.

Access and awareness are important levers that will significantly drive increased penetration over the coming years.

We are making terrific progress building awareness and securing coverage globally, including broad coverage for Omnipod five in the U S.

We've built a unique leadership position in the U S pharmacy channel, which improves functional access for both the type one and type two populations. The vast majority of our U S customers continue to pay less than $50. Each month through the pharmacy for Omnipod Dash and now Omnipod five with many paid nothing.

We've eliminated lengthy lock in periods and upfront costs that are common in the <unk> channel and our pay as you go model provides easier and more affordable access for our customers and removes risk for payers.

And we are delivering this easier access combined with lower costs, while also delivering an improved customer experience and better outcomes. That's a.

Winning combination and one that resonates with people using multiple daily injections, a population from which we continue to capture approximately 80% of our new customers.

Our pharmacy channel and pay as you go business models also connect with people with type two diabetes, we are acutely focused on making excess simple and more affordable providing an unmatched form factor and generating clinical evidence that supports what omnipod can do for the type two population.

Because the Omnipod offering is so compelling during the second quarter type two years Theres represented almost 30% of our U S. New customer starts as expected. This is a percentage reduction from prior quarters, because omnipod five is indicated for use with people with type one diabetes as is the case with all Aig's systems.

Therefore, we expect the mix percentage of new customers to change as more people with type one adopt omnipod five we saw this begin in Q2 and we're excited to see it continue now that we are a full market release. Nevertheless, we continue to see a strong number of new customers with type two adopting omnipod dash and we remain confident in our ability to further.

Penetrate this underserved population.

A major component of our awareness efforts as our direct to consumer advertising campaign.

We ramped our DTC program ahead of the full market release of Omnipod, five and a sense accelerated our spend.

This has resulted in more people wanting to learn about omnipod five and the impact it can have on their lives and those that care about we expect our DTC efforts for Omnipod five will be even more effective than what we have experienced for omnipod dash we.

We are also using DTC to drive awareness for Omnipod in select international markets.

Customers Love Omnipod five.

Because of the number of first it brings to the market. It's the first pod based AI system. The first fully compatible phone control. The AAV system. The first system no one has to plug in to access data and the first with the smart bolus calculator to directly incorporate trends.

We've heard humbling and inspiring stories from countless customers and we're just getting started.

I wanted to share a couple of stories, we've heard from individuals adopting omnipod five and how impactful it has been for their lives.

An individual who had been using an insulin pump for over a decade and recently switched to Omnipod five told us that after 10 years of worrying about visible tubes, getting caught on door knobs and dealing with the nuisances of being tethered to a pump. He now spends more time focusing on life.

Outcomes have improved including his overnight blood sugar and he no longer has to live his life with diabetes top of mind.

We also heard from a physician who has lived with type one diabetes for 43 years.

He noted that during that time, he has seen treatment options evolve and change, but omnipod five is the largest leap. It improvements he has ever seen this very experienced physician called our system quote remarkable these.

These two stories are just a small representation of the amazing testimonials, we continue to receive from Omnipod five users. There's a common thread that connects all the stories, we hear from users Omnipod five is redefining how people manage their disease and is making their lives simpler.

The impact Omnipod five is having is clear and it's powerful.

In Q2, the first full quarter of limited market release, Omnipod five already represented over 25% of our U S new customer starts.

We expect that percentage to accelerate with the U S. Full market release as we now sell through a broader distribution channel, including all of our wholesalers that supply products to approximately 88000 retail pharmacies.

We are also having outstanding success securing coverage for Omnipod five.

Today, we have over 55% covered lives for Omnipod, five which is well ahead of where we were when launching omnipod dash and represents a significant increase from Q1.

Our team has done an amazing job and we expect to make meaningful progress the rest of this year and into the next.

Omnipod five is now fully available through retail specialty and mail order pharmacies to anyone with a prescription and coverage in line with our expected timing.

Our limited market release provided key learnings about how health care professionals and customers interact with our product onboard and virtually train.

All of which are dramatically easier than ever before.

Already the small improvements we have implemented are resonating with users, especially those coming from a tube pump who transitioned to a more simplified experience.

In fact, one of the key learnings is that physicians and patients can rely on the automation of the system to do the work for them during the first few days.

Omnipod five works with the first part out of the box and then it learns and adapts to personalized care for each individual user typically within the first or second pod change. This.

This ability to automatically personalized therapy, clearly differentiates omnipod five from all other systems on the market quite simply Omnipod five eliminate significant burden and shared work between patients and their physicians.

Our target market continues to be MDI, not surprisingly many of our omnipod five new customers come from competitive pumps and people are loving the experience.

The clinical benefits of Omnipod five were clearly demonstrated by the preschool pivotal extension data we shared at Ada that built on the strong results. We saw during the study the initial phase which were recently published in the peer reviewed journal diabetes care.

During the first three months phase of the study as well as through the end of the extension phase patients achieved an average <unk> of six 9% compared to seven 4% at baseline.

The data clearly demonstrated these individuals maintained their improved levels through the extension phase time and range and present time in hypoglycemia also showed sustained improvements during the extension phase demonstrating the durability and power of Omnipod five for this critical population.

We look forward to receiving our preschool indication for Omnipod five this year.

The engagement around Omnipod five at Ada was really something to see we met with hundreds of attendees at our booth and how the product theater that was standing room only.

It was here, where we shared patient case studies and real world experience of Hcp's, who have had remarkable success with omnipod five.

The overwhelming feedback was that Omnipod five clearly stood out as the most robust <unk> offering and many of the MDI and tube pump users and attendance have since adopted our technology.

Overall, Ada marked another opportunity to highlight our products and clinical accomplishments that demonstrate our omnipod can change the lives of people with diabetes around the globe and how important and meaningful our mission is.

We are also advancing our innovation pipeline.

We're developing the next generation of Omnipod five furthering our iOS development and working closely with our CGM partners <unk> common Abbott our innovation priorities are focused on growing our addressable market building, our next generation AI technology, and creating digital and data driven products to make diabetes management easier for our customers and their physicians.

Moving on to our international operations, our Omnipod five CE Mark submission is moving swiftly to review and we expect approval over the next couple of months.

This is an important milestone for our international business as we work to bring Omnipod five to people around the world.

Hey, Mark clears the way for us to focus on completing our cloud based infrastructure that is compatible with local data protection regulations developing country specific launch plans channel and customer experience approaches and seeking reimbursement.

Omnipod five as a transformative platform and we look forward to entering our first international markets in mid 2023.

We will take a staged approach to entering markets. So we can ensure successful launches in each country in which we operate.

In addition to bringing Omnipod five to global markets. We continue working to enter new markets and recently launched Omnipod dash in the United Arab Emirates, and Saudi Arabia Omnipod.

Omnipod is now available in 24 countries and we are building local teams and advancing our regulatory and reimbursement goals.

These efforts will serve us well as we bring omnipod five to our international markets and strengthen our competitive position.

Lastly, the global supply chain and inflation each presents significant challenges to insulet as they do for most manufacturers across a range of industries.

However, we continue to navigate these headwinds and increase our resiliency, ensuring ample product supply, including supporting the Omnipod five launch and the needs of our growing global customer base.

We are mitigating supply risks by securing components well ahead of our capacity needs.

While this comes at an increased cost that will have a near term impact on margins. We are taking the appropriate steps in these turbulent times to ensure uninterrupted supply for our current and future customers.

The footprint of our global manufacturing operations as one of our many competitive advantages and we advanced our efforts to further strengthen our capabilities. We recently broke ground at our new manufacturing location in Malaysia. The future facility located in <unk> represents an investment of approximately $200 million over the next five years.

Provide approximately 400000 square feet of manufacturing space and has more than 500 full time employees at capacity.

Our regional sourcing strategy includes the use of local suppliers for components and we've already outlined our plans to utilize environmentally responsible and resource efficient materials and are building design.

We expect to begin production at this new facility by the end of 2024.

This facility supports our operational strategy to increase our global manufacturing redundancy built our global talent base and support future international market expansion efforts.

In closing the second quarter marked a number of financial commercial and operational milestones our entire Insulet team continues to execute with an unwavering commitment to our mission and to our customers.

We are proud of all the work and accomplishments we achieved this quarter and now we are setting the stage for sustainable long term growth.

I'll now turn the call over to Wade.

Thanks, Jim we've made great progress in Q2, as we delivered another quarter of record U S and global new customer starts and achieved a number of notable milestones, including the U S. Full commercial launch of Omnipod five within the time range we expected.

We are advancing each of our strategic imperatives navigating supply chain and inflation challenges in maintaining our focus on fulfilling our mission.

We generated 18% revenue growth in the second quarter, finishing above the high end of our guidance range.

On a reported basis for total revenue foreign currency was a 390 basis point headwind compared to Q2 of last year.

U S. Omnipod revenue growth was 31% exceeding our guidance range revenue growth continues to be driven by the compounding benefit from record new customer starts and increasing volume through the U S pharmacy channel, including initial contributions from Omnipod five.

Q2 revenue included an estimated $7 million of net channel inventory build which consisted of omnipod five inventory build partially offset by a reduction of classic omnipod and Omnipod dash inventory at our distributors additional.

Additionally, as a reminder, Q2 of the prior year included a favorable comparison for an approximate $2 million.

Catch up in rebates from earlier periods.

<unk> hundred five and Omnipod dash, new customer starts combined were up sequentially to over 90% of our total U S new customer starts.

Comprised of Omnipod dash at approximately 65% and Omnipod five over 25%.

In addition, pharmacy channel volume increased to approximately 65% of our total U S volume.

International unemployed revenue increased 9% at the low end of our guidance range driven by Omnipod dash adoption, partially offset by AIB competition headwinds and the pandemic compounding impact over the past year on a reported basis foreign currency was a 1130 <unk>.

At this point headwind over prior year.

During Q2, both are estimated global attrition and pod utilization remained consistent.

Drug delivery revenue declined 36% in line with our guidance range.

Gross margin was 63, 6%, representing a 580 basis point decrease or 640 basis points on a constant currency basis.

The primary drivers for the expected higher mix of costs and manufacturing inefficiencies as we ramp our U S manufacturing operations, a higher warranty accrual for costs related to Omnipod dash Pbms for battery lives.

Age as well as higher costs, given the mix impact of Omnipod five ramping.

All partially offset by growing volume through the U S pharmacy channel.

As a reminder, the higher mix of volume at our U S manufacturing facility growing Omnipod five volume and the higher component costs included in our inventory balance will continue to pressure gross margin for the remainder of this year as we sell the product out of inventory.

Operating expenses were above our expectations due to $27 3 million of legal costs as well as $3 4 million of costs associated with the retirement and advisory services of the former CEO of <unk>.

Excluding these charges operating expenses were higher than Q2 of last year due to continued investments in sales and marketing such as our Omnipod five launch efforts.

International expansion continued investments in innovation and scaling our global business to support our growth.

Adjusted operating margin and adjusted EBITDA in Q2, which exclude the legal and CEO transition costs were one 3% and nine 2% respectively.

Both were impacted by the gross margin pressures and increase in operating expenses and unfavorable foreign currency.

Turning to cash and liquidity during the quarter, we secured an additional $10 million of availability under our revolving credit facility. We ended the quarter with over $700 million in cash and the full $70 million available under our credit facility overall, our financial position is strong.

And provides flexibility to invest across our business to fuel sustainable long term growth.

Now turning to 2022 guidance, we are raising full year revenue to a range of 14% to 17%.

For U S. Omnipod, we are increasing our revenue range to 23% to 26%.

Revenue growth will be driven primarily by increased omnipod dash volume through the pharmacy channel the benefit of our pay as you go model.

Which should expand both our type one and type two customer base and increasing volume for Omnipod five following our full market release.

As a reminder, significant revenue from the Omnipod five launch and adoption ramp will take time, given our annuity based business model.

For International Omnipod, we are reducing our full year revenue guidance to 9% to 12% related to the impact of AIB competition in our international markets.

Revenue growth will be driven by ongoing Omnipod dash adoption, which is sold in all of our markets. We expect international revenue growth will be the highest in the fourth quarter of the year due to an easier comparison as well as an expected improvement in COVID-19 conditions.

Lastly for drug delivery revenue range, we are lowering full year guidance to a decline of 35% to 40%.

As a reminder, 2021 levels were elevated as a result of the pandemic.

Turning to 2022 gross margin, we now expect a range of 65% to 66% representing a decline of 200 basis points from our previous expectation as we continue to encounter higher costs associated with ramping U S manufacturing and Omnipod five volumes higher warranty costs.

Costs, and the ongoing inflationary and supply chain pressures in the broader macro environment.

We continue to execute strategies, partially offset these headwinds while also ensuring we have more than enough capacity to meet expected demand on.

On a year over year basis, our gross margin will be impacted by product line mix from lower drug delivery revenue higher costs associated with our U S manufacturing ramp product mix, including ramping Omnipod five manufacturing components due to inflation and warranty costs. We expect these headwinds to be.

Partially offset by the benefit of increasing volume in the U S pharmacy channel.

We expect operating expenses to rise year over year, driven by ongoing investments in our sales and marketing efforts, including the launch of only five five and increasing DTC advertising.

As well as expanding our innovation pipeline and clinical efforts and scaling our support functions.

Excluding the legal and CEO transition costs, we now expect operating margin to be in the high single digits. As a result of the gross margin reduction and the macro environment, creating inflationary and foreign exchange pressures.

Lastly, we continue to expect capital expenditures to increase slightly due to ongoing investments in key areas of our business.

Turning to our third quarter 2022 revenue guidance.

We expect total company growth of 17% to 20%, including Omnipod growth of 18% to 21%.

Based on current foreign currency exchange rates, we estimate the impact will be approximately 500 basis points on a reported basis for total revenue.

For U S. Omnipod, we expect growth of 24% to 27% driven by the benefits of a recurring revenue model.

Knowing omnipod dash volume through the U S pharmacy channel and ramping contributions from Omnipod five.

We expect Q3 international Omnipod growth of 7% to 10% driven by the ongoing Omnipod dash adoption.

We offset by competitive headwinds and the compounding impact on new customer starts in 2021 and into 2022, largely due to the pandemic.

We estimate the unfavorable foreign exchange impact will be approximately 1300 basis points on a reported basis.

Finally, we expect Q3 drug delivery revenue declined 14% to 5% as revenue is normalizing to pre pandemic levels.

In conclusion, we have achieved a number of critical milestones that further position insulet for growth.

While there continues to be macro related challenges. These are exciting times with a full market release of Omnipod five now fully available through retail pharmacies and soon CE Mark approval for Omnipod five internationally Ron.

We are on track to deliver another strong year of revenue growth and new customer growth. While also investing in key areas throughout our global business in order to drive future growth and sustained long term value creation.

With that please open the call for questions.

Thank you Sir.

At this time, if you have a question. Please press star one on your Touchtone telephone.

We are limiting each participants questions. Two one however, please feel free to go back into the queue and if time permits we'll be more than happy to take your follow up questions.

I show. Our first question comes from the line of Larry <unk> from Wells Fargo. Please go ahead.

Good afternoon, and thanks for taking the question and congratulations on a nice quarter and the.

Market release of Omnipod five.

Wade I actually wanted to start with the margins given that that was a.

A pretty big change here, so totally understandable what's happening this year.

Gross margin in the Opex.

Some color on how youre thinking about gross margin.

Operating margin in Q3, and Q4 and when do you think you can get back to that 70% gross margin.

That you recently had and how are you thinking about leverage beyond 2022, thanks for taking the question.

Hi, Larry.

So for our margins as you mentioned, we stopped them down this quarter for both some micro and macro issues I think has been well publicized across many companies. The macro environment is tough both from an inflationary and foreign exchange and we felt that as well. We also have a couple of things that impact that.

To us in the quarter you saw us talk about our warranty increase on our <unk> as well as some of the volume that we are increasing in our active facility and then just to highlight for folks you saw us take down our gross margin guidance for drug delivery, that's a higher margin product line and so when we reduce revenue guy.

Since there thats a headwind for US and then we've increased our volume for Omnipod five our expectations for Omnipod fiber growing even above what we originally thought and cost of goods sold are slightly higher for omnipod five as well. So although that's a good thing that we are growing volumes with omnipod five it is a headwind to our cost of goods sold so that creates about a 2%.

Impact to gross margins and that really is what drops through to operating margins.

We also have other inflationary headwinds throat operating expenses, given the wage environment as well as services and other increased costs out there, but that most companies are dealing with so that's the reason that we changed our guidance. It's a little too early to tell what expectations will be.

Beyond 2022, we have to monitor closely the macro environment here. What we do know is that we are paying higher cost for inputs raw materials and components to build capacity and you can see it in our inventory as we continue to grow inventory our operations teams are doing a great job.

Identifying capacity and growing inventory in this environment, but it is coming at a higher cost and with the inventory that we built a lot of that is deferred over a six month period of time and so that's already starting to impact what our gross margins will be next year. So, although we're very happy to be building inventory and.

Developing extra capacity it does come at a higher cost and so thats going to impact us for some time, but we're not going to look out beyond that at this point, Larry I think we've got to monitor the macro environment and see what it looks like.

What we are going to commit to is that over time, we will continue to expand gross margins and operating margins. It's a key focus for us it may not be in any particular year.

Especially with the macro headwinds that we're dealing with today, but you can count on us to continue to expand margins over time.

Thank you.

And I show. Our next question comes from the line of Robbie Marcus from Jpmorgan. Please go ahead.

Oh, great. Thanks for taking the question and congrats on a nice quarter.

As it relates to the U S. New patient starts I'm surprised omnipod side was already over 25% I would imagine the exit rate is even higher than that maybe you could just talk about the types of patients you're seeing are these new to therapy or the switching from.

Other therapies, how high a percentage of new patient mix do you think omnipod five will settle out as.

And is this in the short term at all changing your Youre type one and type two mix. Thanks a lot.

Thanks, Ravi Thanks for the congratulations too.

I think it's a little bit early to say about how the rates are going to settle out.

Very happy with adoption of Omnipod five across the board as we said more than 80% of our new customer starts or patients coming from MDI.

And so that's that's our target market, we are seeing a high percentage of patients converting from Omnipod dash and to me that's a great sign of demand because what it shows is that patients who are already on the omnipod experience. We know they have been waiting for Omnipod five and so we're actually I think getting a somewhat higher percentage of conversions already and if you remember.

During the limited market release, what we've been telling the market is the fastest way to get on Omnipod five is to get on Omnipod Dash and then convert so we're seeing that very well and we are seeing conversions from other tube.

Tube pump offerings and so so we're getting a mix across the board and we're really happy with that.

Hey, Ravi it's spread just dropped in here a little bit you asked about the exit rates. So yeah. Good good pick up there at 25% was our mix for the entire quarter. So remember we we just entered a full market release and so as you can imagine the ramp throughout the quarter.

Really the exit rate was quite a bit higher than 25%. So we're in a great spot going into Q3, you should expect the Q3 is going to be a much higher mix of our new starts as omnipod five and the other thing to remember as I know many of you look at <unk> data to sort of understand what new starts or there is a component there called <unk>, which is used.

A really good way to take a look at new prescriptions on a product probably by five it's pretty high and Theres just some things to keep in mind, there one Jim called out the percent of conversion. So we have a very large percentage of new to omnipod five that are conversions from our legacy products. The other thing to remember is that Omnipod fiberglass two.

And so it requires a prescription for a starter kit and a refill of pods and so as you look at <unk> data you just kind of want to make sure that youre youre only doing one of those and that you remember that the majority of new nominee pod is conversions, but we're thrilled to be in full market release and the team is excited to just be in full promotion mode.

Starting Q3.

Thank you.

And I show. Our next question comes from the line of Travis Steed from Bank of America. Please go ahead.

Congrats and thanks for taking the question.

I was looking at the <unk>.

<unk> for U S Omnipod growth specifically in the U S. In the first half was about 26% and the guide for the full year, 2003% to 26%. So it seemed a little bit of a step down in the second half, but you do have the COVID-19 comps going away and Omnipod five launching so wanted to get some color on the second half specifically and then on the 7 million.

When a stocking or inventory build with Omnipod five this quarter how much of that was assumed in the Q2 guidance. Thank you.

Hey, Travis glad you asked this question, we get to provide a little more color here.

So first of all you called out the $7 million of channel inventory build and Thats something that you have to factor into the first half second half as youre thinking about the guidance.

Other things to normalize for is we had an incredibly strong Q4 last year and so that creates a tough comp for us. So if you include normalization for the channel build and think about the tough comp. The second half is actually a stronger percentage growth rate and certainly on an absolute dollar basis are much higher than the first half so we've.

Got a really strong U S guide into the second half of the year.

And on the channel inventory build we don't factor in any major channel build into our guidance.

We do factor some trends and some normal order patterns.

And some normal stocking, but whenever we see a large material or significant channel build our channel destock, we call them out just like we have in the past.

And so as we've talked about in the prepared remarks here, we're going to continue to see omnipod five inventory ramp that will be offset by reductions of our classic omnipod on omnipod dash at our distributors and depending on how that matches up is mismatched. It could result in our inventory channel build and so again when we see it material.

We will factor that in and let you guys know in our prepared remarks, but from here, we typically don't build in large stocking or destocking into our guidance.

Thank you.

And I assume our next question comes from the line of Steve Lichtman from Oppenheimer. Please go ahead.

Thank you hi, guys.

Just on your on your clinical programs.

What is the latest outlook for <unk>.

Two pivotal study.

On the clinical study you mentioned versus non AIB.

Are you hoping to use that for enhanced reimbursement have you received feedback from payers that that is possible. Thanks a lot.

Thanks, Steve and then type two program. We've launched obviously, we have first we're serving type two patients very successfully with Omnipod dash, where we have an indication for use and as we as we said in our prepared comments.

We had roughly 30% of our new customer starts where people with type two diabetes and we continue to grow that year over year. So we're very confident that we have a great experience for people with type two diabetes already fantastic form factor great pay as you go model and access through the pharmacy, all which are differentiated but we are working on type two pipeline and as you know we published.

Fantastic feasibility data with Omnipod five for patients with type two we published that earlier in the year at <unk> in Barcelona, and and based on that study we are in conversation with the FDA about the protocol for a pivotal trial and as we get closer on that we'll tell the market more about it.

And I'm going to I'm going to turn to <unk> to talk about the randomized controlled trial.

Yes, Hi, how are you.

We're excited about the randomized control trial and you are right. We are doing that in order to grow our clinical body of evidence, but also it's really focused on driving access and reimbursement in our international markets.

As you are aware, where we consider ourselves our own category with the <unk> system and what we want to do is chart out reimbursement specifics for our offering that we know will be well received internationally annual health, we believe with the strength of the day.

Later on the RCT should help us with negotiating pricing and setting reimbursement in countries, where there are there is not reimbursement today with AIG or certainly.

We want to get higher reimbursement for our offering so really excited about doing the study we are in the United States and France, because they are two of our largest markets and in fact, we actually very early on in the enrollment process, but we already have almost 50 people enrolled in seven sites.

And our U S market and will be soon enrolling our first patients in France. So really excited it's just one of the many levers that we're pulling in order to get ourselves ready to launch next year in our international markets with Omnipod side.

Thank you.

And our next question comes from the line of Chris Pasquale from Nephron Research. Please go ahead.

Thanks, and congrats on the quarter guys.

I wanted to circle back on margins you talked about a lot of the puts and takes on gross margin, but SG&A was up meaningfully year over year, even if you back out some of the onetime stuff. So just curious was there anything to call out there and how do you think about that moving forward and then one just detail on whole five are you getting a price premium there versus <unk>.

Dash some of the prescription data suggested it might be price, Ohio. Thank you.

Hey, Chris I'll start it and then I'll pass over to Brett on on the questions on Omnipod five so regarding SG&A.

They have caught it in the prepared remarks, we talked about increasing our investment in direct to consumer advertising on the front end of Omnipod five and we certainly have a lot of investment.

For Omnipod five both here in the U S. As we prepared for the full market release and work their way through the limited market release, and then internationally. We've got a significant amount of work going across many functions marketing and in particular in <unk>.

<unk>.

And we've got a significant amount of work to do country by country from the infrastructure that needs to be built to support our cloud infrastructure and what we have.

To bring with our Omnipod five system is really this differentiated system that works in the cloud and brings a lot of benefits to both the hcp's and the customers and so we're working on that it's different in every country outside the U S. We have to be aware of the privacy laws and other things so a.

A lot of investment there and Thats, what Youre seeing show up in our SG&A today, and I'll pass over to Brent on Omnipod five yeah, Hi, Christie the pricing of Omnipod five versus Dash remember, we said, we would price it at parity to dash and we're sticking to that so we are offering payers. The exact same rebates for omnipod five that.

We are not offering omnipod five in <unk> and so they do have to move to the pharmacy channel so that will cause.

A little bit of price lifts frankly in the pharmacy channel for the average pod pricing, but per payer there is pricing at parity with just a few exceptions.

Thank you.

And I show. Our next question comes from the line of Joanne Wuensch from Citi. Please go ahead.

Thank you for taking my question and nice quarter.

As you prepare for the international launch of Omnipod five what have you learned so far and the limited version here in the U S that you can take over there and should we think of a limited launch in the international market Arena also.

Thanks.

Yes, Hi, Joanne this is Brett.

Most of the learnings from the U S. We can translate to a European launch and so remember there is theres a lot to learn from <unk>, 5%.

Self service Theres different training.

We've learned a lot with training and support in coordination with <unk> com, our CGM partner. So all of those will serve us well when we launch in Europe . There is still work to do and Jim mentioned.

Well on our way to CE Mark in Europe , and we've still got work to do even after CE Mark. So we're targeting middle of 'twenty three for the first markets in Europe to come onboard and that will that effort will move into 24, because they are going to be staggered launches. So there's work to do.

That is omnipod and we're looking at the potential for different pricing in those markets. So all in all there's work to be done even after CE Mark and you can expect those launches to come in a staggered fashion starting in the middle of 'twenty three.

Just tagging on the back of that Bret that one thing to bear in mind is.

As we launch Omnipod five and we go market by market.

With all of that work, we're doing pioneered cloud based offerings.

We're also digging a huge mode.

We're going to do it we're going to do it sequentially, we're going to do it right and we're going to do it to win it will be very difficult for anybody to follow.

Thank you.

And I show. Our next question comes from the line of Cecilia furlong from Morgan Stanley . Please go ahead.

Hey, good afternoon, and thank you for taking the question.

I wanted to ask if you could just provide a bit more color just in terms of takeaways from your limited distribution period, what was incorporated or adjustments that you made as you transition to full market launch and then on the.

Joseph back to you.

The free trial period with Omnipod sides.

The rationale shifting from 30 day to 10 day and thank you for taking the question.

Yes, I'll tell you this Brett so the list is long what we learned in the LMR and we're thrilled again to be moving into full market release, but we commented on some of what we've learned a lot has to do with the Onboarding experience. We adjusted the trading protocols some of the self service options some of the expectations setting.

For those that might be coming from a AI system versus MDI.

Theres a lot to learn there and we got really comfortable with that which is why we are moving to full market release.

Okay.

And the second part was I think around the free trials all of the free trial, especially yes. So the 10 days. It's a great question because we are committed to free trial with <unk> hundred five and a 30 day free trial with Dash and while we wanted to do that same trial with <unk> five <unk> five as a system. It includes next Tom CGM, So that was really it.

Coordination with our partner there and decks com as they offer have a free 10 day trial, we want to make sure that we're not offering a trial that doesn't include a CGM. So a lot of work there and a lot of coordination that went into that but we're committed to doing free trials for omnipod five and something you will see us continue to offer.

Thank you.

And I show. Our next question comes from the line of Margaret <unk>.

William Blair. Please go ahead.

Hey, good afternoon, guys. Thanks for taking my question.

So I wanted to follow up a little bit on the inventory build and kind of what that means for domestic patient adds.

I was flying with our model quickly even if you take out that 7 million. It still seems like those domestic patient adds grew at a faster clip than expected. So.

Can you give us any sense of whether new patient adds domestically for example.

After then overall domestic revenue growth or that's too strong to say that.

On the inventory side, where are you able to talk to distributors in terms of why they wanted to build up so much demand.

Is it because of the CNS.

Supply or they're hearing from patients already that they need to be right.

Sure Hey, Margaret Wade why don't I start with the inventory and maybe a little on the new product ads will pass it over to Brett because you just get the insights from the team.

So on the inventory build some of this is just timing and the way it happened as we shifted from limited market release into full market release and limited market release as Youll recall, we stepped into it by adding in mail order pharmacy specialty pharmacies, but held back on the large bolus of retail pharmacies.

And when we then move to the retail pharmacies, that's when we had significant inventory to move into the channel. So that those wholesalers and distributors can feed as Jim said in his prepared remarks, the 88000 retail pharmacies across the country and so that's just timing and we will continue to build inventory.

Larry with Omnipod, five and it just depends on the end of the quarter, where we're at with the reductions on the Dash and classic if we have more inventory builds in the future, but you are right. It does speak to the excitement out there and the demand Thats building out there and.

That's why we're trying to get as much channel inventory out there as soon as we can now.

Because of the access as Jim mentioned as well in his prepared remarks, we're well ahead on access that was one of the other major.

Metrics that we were managing in order to go to full market release, and now that we're over 50% access out there. There are many people that can get prescriptions and now economic five five so it's pretty exciting to see the inventory stocking in the channel and all the pharmacies across the country that people be able to access the product in and from a domestic AD standpoint, you are.

Right that is one of the reasons that we exceeded the high end of our guidance. This quarter, we don't get a significant amount of revenue from new customer starts in any particular quarter, just because of the annuity based model that we're in but I know you are familiar with but Brent any color you'd want to add on the domestic dense yes, Margaret I mean, it's this inventory build is.

Almost something Thats, just unavoidable with a product like Omnipod five I mean, ideally you'd love to see the dash inventory drop at the same rate that omnipod fives going up but look we try to project. This as well as we can and communicate with our distributors and I think it's fair to say demand just exceeded our expectations here, especially with conversion. So the one thing we have to point.

<unk> was when we launched dash, we did see conversions from our legacy product, but demand for Omnipod five is just much different than we have.

<unk> been waiting for Omnipod fight for a long time and that is we just saw a lot more convergence a lot more demand and that resulted in a little bit of inventory build but again it is healthy and we try to keep it to a minimum.

Thank you.

And I show. Our next question comes from the line of Jayson Bedford from Raymond James. Please go ahead.

Good afternoon, and congrats on the progress.

Jim you've set a high bar for yourself, what the quarter here at least in the U S.

Wanted to ask on the international it was down quarter on quarter model typically doesn't lend itself to sequential declines in unrealized FX was probably a bit of a factor here, but.

Why was <unk> international revenue down quarter on quarter and it looks like the implied <unk> is kind of flat to down slightly as well so a little detail there. Thanks.

Sure Jason it's weighted I can take that one and this is what we've seen historically as well. So we do get this question from time to time, it's typically when we see that sequential down and it's certainly an understandable question because it's an annuity model, but what we see happening across our international business and this is the case in prior years as well.

Because we sell a lot of our revenue through the distribution channel, we have ebbs and flows in the distributor inventory patterns and order patterns and depends at the end and beginning of quarters, where we're at in fulfilling those orders so.

It lends itself to be a little bit more difficult to understand because it is an annuity model, but thats it.

You've also seen us call out internationally whenever we've had stocking or destocking of a material nature, you'll see us call that out as well so when we don't and we see a couple of million dollars swings between the quarters, It's really just an order trend.

Nothing that we're concerned about I think we should be calling out as well and as we move into the second half of the year Youre right Q3 goes up but we typically see a seasonal.

Decline in Q4s, as well and Thats some of the distributors I think managing their inventory at the calendar year ends and so.

Nothing to talk about here are adjacent to other than just some normal inventory trends and.

And again, we'll call it out when we see anything material.

Thank you.

And I show next question comes from the line of Joshua Jennings from Cowen. Please go ahead.

Hi, This is Brian for Josh. Thank you for taking my question.

On the cost of therapy, a competitor sighted patients delaying comm purchases, specifically because of the upfront costs, how big of a factor do you judge cost to be as a driver for Omnipod five adoption and do you have an ability to or I guess, an interest and low ring.

Current co pays further should pump manufacturers introduce payment plans that matched the typical co pay.

Hi, Josh this is Brett.

Brian sorry, we.

We think cost is very important and it's one of the reasons why years ago, we decided to move to the pharmacy channel more important importantly moved to a pay as you go model because it is the upfront fee is very disruptive and very difficult for patients, especially if they have not met their deductible. So for US. We don't we don't see these type of <unk>.

Headwinds in these fluctuations because the co pays and the pharmacy are predictable and they're low and remember the majority the vast majority of our patients pay something less than $50. So the average is much lower than that and as Jim said, many pay zero. So the pay as you go model is really important we top that off with <unk>.

Free trial, you could try omnipod for free if you want to and then I think the final part of your question is about lowering co pays and Thats just an effort, we're always making and we talk about that as functional access. So we want to do a few things we want to remove prior offs, we want to remove high co pays and in some cases, we're willing to.

Give up a little bit on the rebate percentage with payers. If we can get that accomplished because we want to remove every obstacle we can to get it on omnipod.

Thank you.

And I show. Our next question comes from the line of Matthew O'brien from Piper Sandler. Please go ahead.

Afternoon. Thanks for taking my question. So wait I think you've kind of started talking about this but if you adjust for that inventory build in Q2 <unk> grew on a stacked two year basis low low 20% in Q2 low 20% in Q1 now you are expecting that big bump in Q3 Q4 and into more of that.

Mid twenties on a two year stack basis, so where is that growth specifically expected to come from is it an acceleration in the type one patient population is that more conversion from existing.

Pump users I mean, where is that really coming from here in the U S. Thanks.

Yeah, Matt I'm not sure quite followed all of that math, but I think if I followed your rate what you are seeing is.

First half strong growth rates.

If you do normalize for that $7 million channel inventory build we have about a 26% growth rate in the U S. In Q2, and so then you take that and you look at the second half guide, whereas you said were in the mid <unk> and Thats, a strong guide for us, especially given that.

Tough competitive comp we have in Q4 of last year was such a strong quarter and then where's the growth going to come from it's all the above Matt.

Pretty exciting as you know.

All of the drivers that we've had in the business before Omnipod five are really what are continuing to drive the business here. The pay as you go model the dash product itself, all the economic benefits that breakfast mentioned.

So as well as the differentiated opportunity we have in type two in the pharmacy channel. So a lot of drivers and that is going to be what continues to drive the business and then omnipod five at 25% of the new customer starts here in Q2 will continue to be a driver as that continues to ramp. So we've got a lot of growth momentum in the U.

And I think the guidance reflects that.

Thank you.

And our last question comes from the line of Dane Reinhardt from Baird. Please go ahead.

Thank you. Good afternoon, guys. This is actually Jeff on for Deane, I apologize I'm, having some phone issues today, but.

Two questions I guess, one just clarifying we keep talking about the $7 million stocking tailwind in the second quarter I thought you said some of that was netted out between old on the pod.

Hi.

Inventory coming out should we be thinking about that as a one timer of $7 million or is it a little less than that and then Jim just wanted to ask you. This is your first full quarter now as CEO of our first quarter as CEO .

Lending is going way up is this conceptually how we should think about your Europe .

Revenue Guy Youre going to drive revenue and cost be damned or at least cost don't matter in the near term, we're going to push the top line and the competitive mode as much as possible just trying to understand your style here maybe thanks.

Sure Hey, Jeff.

A little disappointed actually if you were going to be honest it was great to hear your voice.

Just answer the first part really quickly the $7 million is net so that is the net impact of Omnipod five inventory ramping in classic Omnipod dash coming down.

Jeff Thanks for your thanks for your question and I actually Love your question.

And it's by the way, it's great to be here on my first quarter end.

11, this and we have a great team and a great strategy and have incredibly talented people and so much passion, but in answer to your question. I don't think you should think of me as somebody who is going to cost be damned.

Have massive growth opportunities in front of us our investment thesis remains the same which is we're going to drive omnipod five we're going to drive successful launch and successful growth of Omnipod five we're going to continue to drive international growth with Dash, we're going to continue to drive type two growth with dash and we're going to fund all of our great innovations that are coming to market, but where.

To be very prudent with cost and how we do that we're obviously in a macro environment that presents a lot of challenges we are not immune to that that's happening across industries thats happening in our industry. So we are going to be very prudent with costs and we're very mindful of that but we have fantastic growth in front of us and we're going to capture it.

Thank you.

This concludes our Q&A session.

Like to turn the call back to Jim <unk>, President and CEO for closing remarks. Please go ahead Sir.

And thanks, everyone for joining us today, we've made terrific progress in the second quarter and we're on track for another successful year, despite having to navigate through the challenging macro environment or.

The full market release of Omnipod five is an exciting milestone and we're really thrilled to be in full market release with that offering and our goal is to drive that growth and finished the year strong and sustain our growth for the long term.

I've been really inspired just on a personal note I have been truly inspired in my first two months here as CEO , we're making great progress we are changing People's lives, we've got great and talented people. We have one of the best management teams in Med Tech and we've got phenomenal offerings.

Insulet has never been in a better position to deliver on our mission to simplify and improve the lives of people with diabetes. Thanks, everyone and have a great day.

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

The conference will begin shortly.

As Johan during Q&A, you can dial star one one.

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