Q4 2022 Insulet Corp Earnings Call
Good afternoon, ladies and gentlemen, and welcome to the Insulet Corporation fourth quarter and full year 2022 earnings call.
At this time all participants are in a listen only mode.
Later, we will conduct a question and answer session and instructions will follow at that time.
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As a reminder, this conference call is being recorded.
I'd now like to turn the conference over to your host Deborah Gordon Vice President Investor Relations.
Thank you good afternoon, and thank you for joining us for Insulet is fourth quarter and full year 2022 earnings call with me today are Jim Hollingshead, President and Chief Executive Officer, and Wade Mcmillan Executive Vice President and Chief Financial Officer, Brian.
Christiansen, our executive Vice President and Chief Commercial Officer is also with us for the Q&A portion of our call.
The replay of this call and the press release discussing our 2022 fourth quarter and full year results and 2023 guidance will be available on the Investor Relations section of our website.
Before we begin we 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.
Well also discuss non-GAAP financial measures with respect to our performance, namely adjusted gross margin adjusted operating margin adjusted EBITA 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 opera.
<unk> performance and we believe they're helpful to investors analysts and other interested parties as measures of our operating performance from period to period. Additionally.
Additionally, unless otherwise stated all financial commentary regarding dollar and percentage changes will be on a year over year reported basis with the exception of revenue growth rates, which will be on a year over year constant currency basis with that I'll turn the call over to Jim.
Thanks, Deb and good afternoon, and thank you for joining us in Q4, the global Insulet team delivered another record quarter of growth, which was a strong end cap to a remarkable 2022.
We exceeded our expectations once again, achieving revenue growth of 45% in the U S and over 35% for total Omnipod and our U S and global new customer starts were at record levels.
And 2022 marked our seventh consecutive year of 20 plus percent revenue growth.
This past year, we not only drove consistently strong financial performance. We also achieved a number of critical milestones.
We now have roughly 360000 active global customers on the Omnipod platform, including more than 100000 customers on Omnipod five.
In fact during Q4 Omnipod five represented over 90% of our U S new customer starts.
This transformative technology is the leading offer in the market and has proven to be the obvious choice for consumers.
The 2022 full market release of our Omnipod five automated insulin delivery system was a huge achievement. This is the product our company was founded to make.
And we continue to build on that momentum throughout the year, adding CE mark approval and quickly extending our label in the U S to include pediatric customers down to age two for Omnipod five as.
As well as completing the five 10-K submission for our type two basal only part.
During 2022, we also further strengthened our intellectual property mode, representing a culmination of work throughout the year that should protect our innovation capabilities and opportunities for years to come.
And we made notable advancements in our clinical efforts, including the recent publication of our first look at real World evidence for Omnipod five.
I'll speak in more detail about the highlights of these accomplishments in a few minutes.
Okay.
I could not be more proud of everything the insulet team has achieved in advancing our mission to improve the lives of people with diabetes and.
And on top of everything we've achieved during 2022 I am confident our best is yet to come.
Omnipod five is truly unmatched in Aig's system with Omnipod five we have delivered a number of market first it's the only two bliss waterproof pod based AI system and the first to offer full compatible smartphone control with constant cloud based connectivity.
This means doctors don't have to wait for data to be uploaded when or if a patient visits a physician.
With Omnipod five customers no longer need to plug in their devices to access their data.
Our smart bolus calculator helps patients manage their blood glucose levels and trends and there are no. Other AI systems that include the adaptive algorithm that omnipod bypass.
It works right out of the box and learns each customer specific usage, and then predicts their trends and automatically personalizes their care.
These all are competitive advantages that significantly improve and simplify diabetes management.
Omnipod five continues to drive customer adoption from all market segments.
<unk> users are growing at the high end of our forecast as are those switching from competitive tube pumps and the number of current omnipod customer conversions are exceeding our expectations.
In Q4, the percentage of customers coming from MDI and traditional tube pumps was an estimated 65 35 split compared to our historical 80, 20 mix due to significantly more competitive switches.
This again speaks to the value Omnipod five brings to MTI and traditional tube pump users.
We also continue to win back thousands of customers, who had once been potters and returned to us in Q4 to adopt Omnipod five.
Adopters are coming from all age groups.
Due to higher than expected demand for Omnipod five we increased investments in our support capabilities, primarily within our call centers.
These investments have helped drive our customer and product support experience back to historical levels of excellence.
This has included taking quick action to address certain complaints regarding the omnipod dash and Omnipod five handheld devices.
We previously announced the medical device correction for Omnipod five due to an issue with the controller charge important cable.
The FDA subsequently classified this as a class II correction and we are in the process of providing replacements to our customers upon request.
With respect to the previously announced Omnipod Dash MDC, we expect to complete the replacement of personal diabetes manager is within the coming months.
I am proud of our global teams focus to ensure these corrective actions were executed with a sense of urgency and care.
Consumer focused innovation is central to everything we do.
Only five five was designed with the user 100% in mind and the results and feedback we receive speak to our shared success.
One recent story from a mother of an eight year old with diabetes was particularly touching she said quote Omnipod five has given me my life back I sleep through the night I feel like me again.
Diabetes has moved from the foreground to the background and our daily lives and club.
This speaks to the power of Omnipod five and supports why we designed the product and the customer experience the way we did.
A critical element to our continued strong omnipod growth is an unwavering commitment to expand access and awareness and we're doing this through multiple initiatives.
First is through our growing presence in the U S pharmacy channel with low co pays and broad coverage access to Omnipod five an omnipod dash is affordable and simpler which helps drive adoption and makes omnipod more attractive and accessible, especially during challenging economic times.
Second we priced omnipod five at parity with Omnipod dash, resulting in our ability to meaningfully expand commercial coverage for Omnipod five.
By year end coverage approached 90% of U S lives.
Additionally, because the vast majority of our U S customers paid less than $50 a month through the pharmacy channel. The cost is similar to multiple daily injections, even though our technology offers improved outcomes glycemic control and quality of life.
Our annuity business model in pharmacy access also benefit physicians and payers, we have eliminated large upfront costs and lengthy lock in periods. This offers real value to payers compared to traditional tube pumps sold through the durable medical equipment channel.
This is especially true when you consider that on average individuals in the U S. Changing insurance plans every couple of years.
I also want to share that we recently notified U S classic omnipod customers about our plans to phase out that technology by the end of this year since the vast majority of our customer base no longer is on our legacy product.
We value every classic omnipod customer and we will help them through their transition to either omnipod five or Omnipod dash.
2022 also was another exciting year for Insulet in terms of advancing our clinical efforts and that momentum is carrying into 2023.
We recently finalized our type two pivotal study protocol with the FDA and received <unk> approval, we plan to begin enrollment in the three months study in the coming weeks.
This will be the largest clinical study we've conducted to date and rolling up to 350 people with type two diabetes from 20 sites across the U S.
There will be a targeted focus to recruit diverse and underserved populations to demonstrate safety and efficacy of Omnipod five.
Omnipod five also opens up new avenues for clinical evidence yes.
Yesterday at ATT D. We shared the first release of real World evidence for Omnipod five with data from more than 31000 people using the system for at least three months.
This kind of data is unmatched by competitors and it gives us valuable insights into how people use the product and the outcomes they are achieving.
We're able to see which device settings contribute to maximum time and range and minimal hypoglycemia.
The data demonstrated glycemic results in line with those observed in our pivotal trials and also reinforced the benefits of our customizable target glucose settings.
These are some of the reasons why omnipod five will be a market leader for years to come.
Our enthusiasm is shared by a health care practitioner, who recently said.
Quote the Omnipod five real World data set is striking and then it includes all users since everyone is connected to the cloud based system.
With this large sample and limited selection bias, we see strong time in target range and minimal time below range exceeding glycemic targets on average this is extremely promising for long term benefit in the real world and quote.
Our real world data for Omnipod, five will be incredibly powerful over time since every user is cloud connected for.
For patients. This means we can continue to personalize and improve the overall experience for physicians. This means we will be able to streamline their workflows over time, our intention is to tie that usage data to claims data to further drive omnipod five adoption as well as build a host of other enhancements such as population based.
Health management for payers.
Nobody else in diabetes therapy can create evidence from data that includes all patients on therapy.
This means that we will have unprecedented insights into actual population level usage patterns, which will allow us to constantly improve our offerings and build on our already market leading product differentiation.
While we are thrilled with the market response to Omnipod five winning in the global diabetes market requires a commitment to innovation.
Today, we have a strong innovation pipeline that includes our type two basal only pod future a idea offerings and digital and data capabilities.
Today, our unique form factor and access model are helping us win in the type two population. In addition to type one we.
We deliver a market leading experience and as a result in Q4 individuals with type two represented an estimated 15% to 20% of our new U S customer starts.
We expect to build on our leading competitive position in this market as well as expand our total addressable market with the planned 2020 for commercialization of our new basal only pod.
This will be a unique product for the type two market and will provide us with early entry into the treatment experience and help patients become comfortable with the omnipod on body experience.
We believe this innovation will offer users a clear pathway to adopt omnipod five as their insulin needs for grass.
We estimate the total addressable market for our basal only part is approximately 3 million people in the U S alone doubling our U S. Tam.
We are also making great headway in our development work to integrate Omnipod five was <unk> <unk>, seven and Abbott's Libre systems, and our I O S integration efforts continue to progress very well.
We offer the best AI system on the market today, and our future generations of technology, including CGM of choice, we will continue to strengthen our leading value proposition.
To continue to deliver our unique and leading technology is a key priority for us is our intellectual property.
We have significantly expanded our patent portfolio over the last few years and in this past year, we more than doubled it both organically and through record patent filings in an acquisition.
We acquired the pump and AI deep patent portfolio of Bigfoot, biomedical, including approximately 400 patents and a large number of global patent applications.
Over many years Bigfoot has developed a strong patent library covering areas such as closed loop technology smartphone control secure communications and improved user experience innovations our acquisition of these patent assets add significant strength to our overall intellectual property portfolio.
Additionally, in the fourth quarter, we entered into a mutual agreement with Medtronic not to assert our patents against each other for certain diabetes technologies.
With certain exclusions. This agreement applies to both company's existing products as well as new products commercialized over the next seven years and does not permit cloning each other's products.
The agreement replaces an earlier, one and provides more certainty around covered products and the agreements duration.
Through these efforts, we have created a broad and deep IP moat that positions us incredibly well to build upon our current leading innovative platform and continue to grow our expanding innovation pipeline.
Moving on to our international operations, we had a solid year of double digit revenue growth, even with the ongoing impact of AI competition.
We expect to begin to offset those headwinds in 2023 with the launch of Omnipod five in the U K midyear and in Germany towards the end of this year, marking the beginning of our staged international rollout.
We plan to launch Omnipod five more broadly internationally during 2024.
Lastly, our global manufacturing capabilities continue to support our long term growth trajectory and serve as another competitive moat.
While macro conditions remain challenging we continue to support our growing global customer base and the strong demand for Omnipod five.
Our operations team has worked tirelessly to secure components and build product ahead of our forecasted demand.
We remain committed to providing uninterrupted supply and the highest quality product to all our global customers.
In closing the fourth quarter marked a terrific end to a remarkable year of strong financial performance and operational achievements.
We have so many exciting opportunities in the years ahead and the entire Insulet team remains committed to executing our mission and strengthening our long term growth trajectory.
I will now turn the call over to Wade.
Thanks, Jim.
22 was an exciting year with the U S launch of Omnipod five in the fourth quarter was no exception.
We once again delivered strong financial results, while advancing our mission.
In Q4, we generated 23% revenue growth, finishing above the high end of our guidance range.
Driven by total omnipod growth of 36%.
On a reported basis for total revenue foreign currency was a 250 basis point headwind compared to Q4 of last year.
U S Omnipod revenue growth was 45% exceeding our guidance range.
Revenue growth continues to be driven by our annuity based model with cumulative record new customer starts and growing U S pharmacy volume.
This includes an increasing contribution from Omnipod, five and a premium for the Omnipod five and Omnipod dash pods.
Growth in the quarter included an estimated $15 million net volume benefit associated with the Omnipod five volume ramp.
This was driven primarily by new Omnipod, five customers, including conversions from Omnipod Dash and classic Omnipod, where we again benefited from some customers simultaneously getting both their starter kits and first order of refills.
As well as some initial stocking and retail pharmacies.
This benefit was partially offset by some omnipod five customers.
<unk> a refill as a result of this dynamic.
This volume benefit primarily from conversions will create a tougher comparison in future years as we expect most existing customers to switch to omnipod five in 2023.
During Q4, Omnipod, five and Omnipod dash, new customer starts combined were 100% of our total U S new customer starts.
This is an important milestone in our transition to pharmacy as all Omnipod five coverage is through the pharmacy channel and is the majority as as the majority of Omnipod dash.
As a result, our pharmacy channel volume increased to approximately 80% of our total U S volume in the fourth quarter.
International Omnipod revenue increased 19% in Q4 above our guidance range driven by Omnipod dash adoption.
On a reported basis foreign currency was up 13 point headwind over the prior year, which was approximately three points favorable versus our guide.
As a reminder, our revenue in Q4 of the prior year was impacted by an unfavorable $5 million channel inventory reduction, creating an easier comparison.
During Q4, our estimated global attrition and utilization trends remained consistent with prior years.
With higher utilization in Q4.
No we estimated higher utilization in Q3 above historic trends with the volume benefit of the initial omnipod five ramp here.
Historically, our U S utilization has been highest in the fourth quarter of the year.
Drug delivery revenue declined 90% slightly better than our guidance range.
Gross margin was 58, 8%, representing an approximate 10 point decrease including a favorable foreign currency impact of approximately 50 basis points.
Cost of revenue included a $21 million net charge or approximately 570 basis points associated with the voluntary medical device correction.
This net charge was comprised of $27 million related to our previously announced Omnipod five M. D C, partially offset by a $6 million benefit due to our revised estimated costs associated with the Omnipod Dash MDC.
Excluding the Q4 MDC net charge adjusted gross margin was 64, 5%, representing a 480 basis point decrease in line with our expectations.
Our growing volume in the U S pharmacy channel, including the associated premium positively contributed to gross margin.
This was more than offset by expected higher mix of costs due to the ramping of Omnipod five and our U S manufacturing operations as well as unfavorable mix from lower drug delivery revenue and a charge associated with the phase out of classic Omnipod.
Operating expenses were above our expectations to support continued higher sales performance and were higher than Q4 of last year as we further invest in our business.
Adjusted operating margin and adjusted EBITDA in Q4 were 11, 5% and 19, 3% respectively.
Both exclude the voluntary medical device correction net charge and a 2 million benefit related to a legal settlement adjustment.
Both metrics were impacted year over year by gross margin pressures and an increase in operating expenses.
Turning to full year results we.
We delivered total omnipod revenue growth of 27% and total company revenue growth of 22%.
Which reflect the incredible demand for Omnipod five ongoing contribution from Omnipod dash throughout our global markets and the benefit of our annuity based business model.
On a reported basis foreign currency was unfavorable over the prior year by 360 basis points.
In 2022, we achieved adjusted gross margin of 66, 2%.
Down 220 basis points and in line with our expectations.
Adjusted operating margin was nine 5% down 200 basis points.
And adjusted EBITDA margin was 17, 2% down 240 basis points.
Both metrics were impacted year over year by gross margin pressures and an increase in operating expenses and were slightly higher than our expectations due to our revenue outperformance.
Turning to cash and liquidity, we ended the year with $675 million in cash in.
In addition during Q4, we further strengthened our financial position by increasing our available borrowings under our credit agreement to $100 million.
We remain in a solid position to continue investing in our business.
Now turning to our 2023 outlook for.
For the full year, we expect total omnipod revenue growth of 17% to 22% and total company revenue growth of 14% to 19%.
For U S. Omnipod, we expect revenue growth of 21% to 26% driven.
Driven by strong Omnipod five adoption coming from both new customer starts and conversions from another omnipod product as well as the continued adoption of Omnipod dash and the benefits of our pay as you go business model.
We currently expect the cadence of our revenue growth to be more weighted to the first half of the year given a tougher comparison in the second half of the year, resulting from the Omnipod five full market release in the U S. In August of 2022.
This includes the related volume benefit from the accelerated pace of customer conversions.
In the second half of 2022.
For International Omnipod, we expect revenue growth of 6% to 10%.
On a reported basis, we estimate a favorable foreign currency exchange impact of approximately 100 basis points.
Growth is mainly driven by ongoing omnipod dash adoption, partially offset by AIG competitive headwinds.
While we are excited to introduce Omnipod five to our first international markets later this year.
Given our annuity model, we are not expecting a material contribution to growth in our international markets for Omnipod five in 2023.
Lastly for drug delivery in 2023, we expect a decline of 55% to 45% representing a dollar decline similar to what we experienced in 2022.
Turning to 2023 gross margin.
We expect a gross margin range of 65% to 66%.
With 2022 at the high end.
We expect a favorable impact from the benefit of increasing volume in the U S pharmacy channel and favorable geographical sales mix.
These <unk> are expected to be more than offset by inflation.
Higher costs associated with our U S manufacturing ramp and.
In product line mix due to increasing Omnipod five volume.
As we previously stated we expect many of these factors to impact our results into 2024.
We expect gross margin in the first half of the year to be near the lower end of the range in the second half of the year to be closer to the high end of the range.
This improvement will be driven by increasing sales volume improving manufacturing performance and timing of the additional costs associated with the Omnipod dash and I'm going to call. It five medical device corrections.
We expect operating expenses to rise due to investments in our sales and marketing efforts, including the phased launch of Omnipod five in our international markets as well as expanding our innovation pipeline and clinical efforts and scaling our support functions.
We expect operating margin to be in the high single digits similar to 2022 levels with significant improvement in the second half of the year over the first half due to timing of investments and improved second half gross margins.
We remain committed to margin expansion and we expect to begin to leverage this bolus of investments in 2024 and beyond.
For capital expenditures, we expect a lower level than 2022, as we begin to leverage our investments building capacity to date.
Turning to our first quarter 2023 revenue guidance.
We expect total omnipod growth of 22% to 25% and total company growth of 11% to 14%.
On a reported basis, we estimate an unfavorable foreign exchange impact of approximately 200 basis points.
For U S. Omnipod, we expect growth of 33% to 36%.
We expect the core drivers of growth to be the ongoing adoption of omnipod five including the benefits of the U S pharmacy channel and our consistent record new customer starts as well as our annuity model.
For International Omnipod, we expect growth of 4% to 7% driven by ongoing Omnipod dash adoption, partially offset by AIG competitive headwinds and estimated order timing.
On a reported basis, we estimate an unfavorable foreign exchange impact of approximately 600 basis points.
Finally, we expect Q1 drug delivery revenue to be nominal based on the current production schedule.
In conclusion, we delivered a strong finish in the fourth quarter and another year of solid financial performance.
We achieved many milestones and entered 2023 with a clear strategic focus and momentum in our business.
We're incredibly excited about the year ahead, and what is to come for our customers and our shareholders as we further execute our global mission.
With that operator, please open the call for questions.
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Our first question comes from Robbie Marcus from Jpmorgan. Please go ahead. Your line is open.
Well first off congrats on a really nice quarter.
Impressive work.
Maybe for my question I'll ask on new patient growth by my math, it looks like you're somewhere in the low 30% year over year with a much better second half versus first half.
You know, it's great to see that competitive switches are becoming part of the equation.
All age groups are 100% in pharmacy, it's basically taken off all the right boxes I guess the question is how sustainable do you think this trend is do you think it's a bit of.
Early adopters are new converters or do you think this is the start of a longer duration multi year trend, where insulet can start to shift toward its market leader in terms of new patients and overall market share.
<unk>.
I'll start with that Ravi, it's Jim and thanks for your congrats by the way.
I'll start and then either way to Brent might want to add color.
Bullish on Omnipod five there is obviously were so strong out of the gate here.
As we talked about in his prepared remarks, and we talked about last quarter. There are some things going on here with starter kits. So it's hard for us to get a quantitative trend, but in terms of the nature of demand. We think it is really strong and we're really bullish omnipod five is proving to be such a revolutionary offer it's such a great experience for customers.
<unk> is delivering such great results.
We think demand will continue to persist for long not just through 'twenty three but for the play for the long haul, but I'll invite bread or way to comment.
Sure Jim I can jump in and how you Ravi.
It is as Jim said, a really strong start here in our first five reported months with Omnipod five in this new platform.
And so we think it's very sustainable as Jim said.
We have.
Significant innovation pipeline to come yet we will be bringing as you know iOS integration with G. Seven Libre, we just got the type two indication.
Pardon me the type two trial finalized with the FDA and so we'll be pursuing an indication for type two for omnipod five as well. So we're just going to layer in a lot more innovations over time, so that gives us confidence that the platform will continue to grow having said that as Jim called out in our prepared remarks, a big driver of our current growth rate.
It is our converting customers moving from the <unk> into the pharmacy channel. So thats, what we called out in the prepared remarks that will create a bit of a tougher comp for us next year. So the new converters, obviously as our current customers classic Omnipod dash customers convert Tommy <unk> five and we're assuming most of them will be done by the end of 2023.
That's the piece that won't be a sustainable because once they convert they are done but the rest of the business just doing incredibly well.
Record new customer starts as Jim said from MDI from competitive switches and so we do think we're at the front edge of a very long multi year growth cycle.
Yeah, Hey, Ravi I'll, just pile on too since you asked about new starts.
MDI is probably the biggest indicator of it so has weighed in Kimball said record NPI record competitive conversions record overall new starts MDI. We think is absolutely sustainable but also remember we are still optimizing things in Q4, we'd never some speed bumps with the Onboarding process access was not.
Maximized, but did get to 90%, which mirrored our our new starts.
For the quarter and then we are just really starting to promote omnipod five in earnest and Youll see some DTC rolling out so.
From my standpoint, I think MDI growth can absolutely sustained throughout the year.
Our next question comes from Jeff Johnson from Baird. Please go ahead. Your line is open.
Hey, Thanks, guys, good morning, or good afternoon, and congratulations on the quarter.
Just wanted to ask a question I guess on the international launch of all five obviously, we've now got a couple of markets that we know it's coming into here in the second half of this year.
Jim maybe you can just level set us again I know there are some stricter restrictions on the warranty periods and some of these markets youre going to have to pursue reimbursement in some of these markets.
Darius no cloud based data regulations youre waiting your way through.
Im going to tell you I mean over here.
TD It was palpable yesterday, the interest and all five to the point that I was a little worried for Doctor lie.
With some of the feedback from some of the doctors just on.
How much they were battling to get her to commit to launch five sooner than a lot of these countries.
There is true interest as you guys I'm sure well know.
So how fast can new patient starts MDI wins competitive converts those kinds of things ramp in <unk>.
The international markets relative to what we've seen so strong here out of the gate in the U S. Thanks.
Thanks, Jeff.
We know there is there is a lot of pent up demand for Omnipod, five and just tons of interest and actually we've talked to training and we knew we heard a little bit about the pressure she was under <unk>.
And.
Obviously, we want to get Omnipod five into every market, we can as fast as we can.
Both because it's a great growth opportunity for us, but really because it's such a benefit to customers.
We know.
Things, we see here in the US feedback we're getting from customers is it's changed.
Changing People's lives, it's such a great experience. It's so simple to use so we want to move just as fast as we can the.
The first thing.
<unk> announced that were going to do the U K in the middle of the year in Germany by the end of the year.
There is a bunch of reasons for that Theyre, both obviously large and important markets. There are some things we can do to execute there a little more quickly we're working really hard in the background to be able to continue to seek to continue to get into market as quickly as we can.
We want to be able to reach all of those patients and obviously, it's in our interest to do it but it's really we need to get to those patients to help them. It's really exciting every market I think specific to your question.
Every market has a little bit of a different set of regulations around <unk>.
Once people have been put on a pompe, a wednesday may switch and that sort of thing I think as a general rule with the caveat that every market is a little different as a general rule.
It won't be as easy to get answer Amit <unk> five for an existing tube pump user as it is in the U S.
Because in the U S. Obviously, we have the pharmacy channel benefit we're in a different category of reimbursement. So people can switch over to pharmacy reimbursement to get on Omnipod five they can use our free trial.
That ability to switch has been a huge growth driver for us in the U S and a lot of the European markets It will be a little bit stickier.
Those markets are still really underpenetrated and.
The standard patient and all of those European markets is still in MDI and so there are a bunch of people who are self injecting who are waiting for the innovation to come in.
It's just really exciting for us we want to move as fast as we can and when we get into market as Wayne said, we have to guide a little but we have to be a little bit cautious about how we got on things like revenue because our model is so many conversed omnipod five and then as you know there is an annuity brand P&L. So the revenue build as people as people get on product and then they use pods and so we have to be a little bit.
Mindful of how we guide on the revenue impact, but we think there is.
Really important underpenetrated markets across all of the markets. We're in and we're moving just as fast as we can to meet that need.
Our next question comes from Jayson Bedford from Raymond James. Please go ahead. Your line is open.
Good afternoon, Thanks, and congrats maybe just.
A simple question here, just looking at the volume and the revenue growth.
80% of volume through the pharmacy is there a ceiling to that number where can that go.
Hey, Jason I'll take that one this is Brett.
There could be but it's not in the same way that you might see with other companies because remember we do have a part D indication from CMS, which means all of our Medicare business goes through the pharmacy channel Medicaid business goes through the pharmacy channel all Omnipod five business goes to the pharmacy channel. So.
Really there is not a ceiling.
But for the fact that we do still have <unk> contracts with our legacy product, which of course, we announced we will we.
We will phase out at the end of the year, and then a little bit with dash, but outside of that if you just look past those products with omnipod five and beyond that really is not a ceiling to the volume that we get at the pharmacy channel is all of Omnipod five will go through the pharmacy channel and all Medicare Medicaid So we're going to be much higher than I think most.
Companies in diabetes don't know, if we'll ever get to 100%, but don't see a ceiling that prevents us from getting there.
Our next question comes from Larry <unk> from Wells Fargo. Please go ahead. Your line is open.
Good afternoon, and thanks for taking the question and congratulations on a really strong quarter here I wanted to shift gears and ask about the basal only pod.
You submitted the 500 10-K, when do you expect approval.
Mid 'twenty three is that reasonable how quickly do you expect to commercialize it do you expect a similar kind of LMR to what we saw with Omnipod five and what kind of contribution are you expecting this year and next year. It just just lastly, sorry for all the questions.
It was a sweet spot for this product, which patients do you think are ideal thanks for taking the question.
Thanks, Larry I'll start I'm going to start with the back into your question and ask Fred to comment on the front end of your questions.
We think the sweet spot customer is <unk>.
Listen with type two diabetes.
Currently doing daily injections or has not started daily injections and so because they've been putting it off because they have a needle phobia or base.
They see they see the inconvenience or trying to do it or are there. They are on daily injections, but they are missing their daily injections, because they don't like doing it.
What what basal only does is it gets upstream in the patient progression for people with type two diabetes and people with type two diabetes as a general rule will have a lot going on to have a lot to manage and so we think theres willpower with that customer at that stage of of transitioning into we're having just transitioning.
Enter insulin usage, where we can really radically simplify their experience make sure they get their daily insulin.
With heightened against ease of use no felt needles, we think we think theres a lot of power and at the research we've done shows that there's power in.
And we expect it to really need.
Need in that part of the market and then importantly, those customers will use omnipod. The omnipod platform. They will get used to the on body experience almost every person with type two diabetes, who needs insulin progresses and their needs for insulin that they need as they go from May go from say once daily basal.
<unk> intensive insulin need which is available basal bolus, which is omnipod five and so we're moving upstream with an offer that genuinely simplifies the experience for those people, but then gets them ready to transition as a nice transition on the Omnipod five and Brent you might have.
Pick up the other part of Larry's question that'd be great. Yeah, absolutely. So Larry first part of your question around timing and clearance of course, we will we won't comment on that except that we have said and it is with the FDA and so we're happy with that we wont speculate on when we will get approval. We did say we start commercialization likely in 2024.
Sure.
Will surely launched in a limited fashion just as we did with Omnipod five dash, we just think Thats a best practice. There is a lot we want to learn we want to scale manufacturing, we want to refine the commercial model, we've got to build access to remember with this product. So we're having conversations today with payers and those are going well.
You should expect that we will launch in a limited fashion, we will probably start in the call point, where we exist today, which is mostly endocrinology and some of the high writing primary care physicians and then we'll figure out how.
How we tackle this population as they do reside with primary care family practice Doctor subset with endocrinology as well we're excited about the product we think it fills a clear need and it's going to be a really exciting, but we're refining the commercial model in the launch plans right now.
Our next question comes from Matt Taylor from Jefferies. Please go ahead. Your line is open.
Hey, guys. Thanks for taking my question and congrats on a good result.
So I did want to wanted to ask you kind of a conceptual question.
<unk> of asbestos and I'd be curious to hear your answer just with all of the <unk>.
Diabetes drugs in the weight loss drugs I think in the most extreme form of this argument people would say oh, you're going to cure diabetes.
We have an impact on the market and demand for pumps.
I guess, what would you say to investors who have that question about weather.
The whole classes of new drugs that actually impact the market does it curb your opportunity at all or do you think that.
This is sort of a sideshow.
Thanks, Matt.
I'll start with that.
First thing is we're thrilled to see innovation in the diabetes space and that's why we get out of bed every day.
We want to help people with diabetes, we want to make sure they get the care they need we want to simplify their lives we want to improve their outcomes and so.
To see a lot of companies innovating in this space, whether it's drug companies device companies.
Data companies.
We're really happy to see that kind of innovation for the same people were trying were trying to help them. So that's all a positive in terms of all the all these new drugs.
It's early days to see I mean, there have been obviously, there's been a lot of noise in our results in the market around it I think it's early days to know how they will impact the progression really they are aimed at people with type two diabetes.
They may or may not impact the progression of leads I think if you look at some of the clinical studies. What you see is in many cases the people in the clinical <unk>.
For those drugs were actually also insulin users, which is an interesting dynamic.
What I keep coming back to us there are half a billion people.
On the planet.
With diabetes most of them have type two diabetes everywhere the western diet goes type two diabetes follows and so it's a massive unmet global medical need.
And.
I don't think its going to have a material impact on our business.
There is so many people for us to help the massively underpenetrated market.
And as happy as we are to see people get helped with new innovations. Our goal is to continue to innovate our platform.
We think there will be more than enough people for us to sustain quite a lot of growth as we help them.
And Matt and Jim said it.
The.
The value proposition of our basal only part if not start to compete with the <unk> launch and these these great drugs that are out now like Giuseppettite on Zoro, we think that at the complement to those as Jim said it many of those patients in those clinical studies on insulin, we know and we hear from physicians all the time that patients do not get on it.
Insulin soon enough and so that's the goal here with the basal only part is to remove the needle phobia to.
To improve adherence and to complement in many cases. These drugs that are already helping people with type two diabetes, and we think there's a clear spot for it but again, we will learn off that limited release and as we launch the product.
Our next question comes from Travis Steed from Bank of America. Please go ahead. Your line is open.
Hey, congrats on a good quarter I did want to ask about the patents.
A lot of movement on the button on your side lately.
Is that more about protecting.
The current portfolio or is it more about building. The pipeline are you expecting the space to get more of a just over the course of the next few years and then also wanted to ask about the I think I heard you leverage that and leverage of a volatile investments and then about how you thought about kind of margin kind of beyond 2023. If you can get back to the kind of normal couple of hundred basis points of margin expansion.
Okay.
Thanks, Travis and thanks for your congrats I'll start with the IP stuff and then I'll ask <unk> to comment on the on the margin side.
It's you know, it's a little bit of both.
We're really bullish on our IP and we've been working we've been working all year actually for months before that but we've had a concerted effort. This year to make sure that we are not just shoring up our IP position, but growing our IP position and we've done that as I said in the prepared comments, we've done that through a number of avenues, including organically.
We filed a record number of patents. This year and then we made we made some settlements we made the settlement with Medtronic to shore up our position and to create some certainty and then the acquisition of patents.
As you know with IP, its both and so.
So.
The more IP you have the better position you are in terms of playing defense.
But also the better positioning of our in terms of commercializing sort of IV aid in creating new offerings and commercialize them. So we think it has put us in a great position on both of those and <unk>.
Specific to Bigfoot biomedical they had they had a very rich.
Very rich set of.
Intellectual property patents and filed patents granted patents filed patents that we find really interesting from an innovation point of view, but it's both ends in terms of offense and defense.
Hey, Jim and I could pick up on the margin piece of the question.
And so Travis as you said we've.
We've been committed to margin expansion and we've had to hit pause here for a couple of years and that's mainly driven by the macroeconomic pressures that many businesses have felt and from an investment strategy standpoint, we had a choice to make and we decided that instead of reducing our investment in commercial expanse.
<unk> and research and development that we would continue to invest through this inflationary cycle.
And even though we're paying higher costs for components and it is putting pressure on our gross margins. In addition to some of the business model challenges like with Omnipod five at a slightly higher cost and our U S manufacturing facility, taking some time to hit an inflection point and still a higher cost facility for us we decided to continue to.
We invest heavily in our leadership position and that is just because of this large market opportunity that Jim just referenced and we've got a really strong leadership position to build on here and we want to make sure that we're as best position as possible and then Youre right. Travis we included in our prepared remarks that continued commitment and.
We think that given the investments that we're making up till now and through 2023 will put us in a position to start to leverage gross margins and operating margins again, starting in 2024, we haven't put a number on it yet or given guidance yet. We're just confident that we're in a good position with the investments, we're making now both in the U S and internationally.
<unk> and across our operations to start to leverage again in 2024.
Our next question comes from Josh Jennings from Cowen. Please go ahead. Your line is open.
Okay. Thanks, Thanks very much.
Good evening.
Wanted to ask about type two.
Opportunity in the U S or just the current business of 15% to 20% of new patient starts are.
Are you seeing.
These are cash conversions to <unk> <unk> five in that segment or are you seeing.
Of that 15% to 20% new patient starts or five accounting for only five accounting for.
Big slug of that and how are you thinking about sort of what's baked into guidance for Omnipod five type two before before you have we have clinical data in on label.
And on label decision by the FDA. Thanks for taking the question.
Hey, Josh I'll take the first part of that question and I can let Wade comment on guidance. So the 15% to 20% that we referenced that as a percentage of all new star. So new starts for us our new to brand never been on Omnipod and those are so those are truly coming from either MDI or a competitive.
Two pump and that's the percent of all new starts that were tied to for US historically, that's been as high as 40%.
It's a lower percentage today, but only because the omnipod five numbers are so high and for the second half of this past year, we've been spending a lot of time in the field speaking to physicians that omnipod five educating the staff explaining the algorithm, helping patients get onboard and so a good portion of our <unk>.
Our field time thats been devoted to the launch of that new product, but the raw numbers of type two patients new to Omnipod are really not that different is just the percentages are down.
We think the operating is fantastic and we look forward to this year, where now that physicians are comfortable with Omnipod five of writing prescriptions that we can start to have a portfolio of cell in the field and start to talk about the type two offering with dash and the value that <unk> brings so it's still a fantastic opportunity for us.
It is really really underpenetrated and we're excited about.
Our next question comes from Margaret Keizer from William Blair. Please go ahead. Your line is open.
Hey, good afternoon, everyone. Thanks for taking the question.
Wanted to maybe talk a little bit about the volume benefit. So you guys have had and part of it is obviously the retail pharmacy partners.
Just the upgrades from older generation Omnipod. So if we take those two individually you've got 80000 retail pharmacies in the U S should all of them have five as of what you've seen to date, which ones do and I guess, how it's throughput there and then similarly in terms of the volume benefits of upgrades where are we.
Now within that process that you guys could give us even a rough percentage on.
And whether or not that should impact the 'twenty three numbers at all Oh got it. Thanks.
Sure Hi, Margaret.
I can start with the conversion insights into volume and then Brett probably best positioned to talk about the pharmacy expansion.
Because those are two of the major drivers, which as you know Margaret we called out in the prepared remarks, just to confirm for everyone. We call conversions are existing omni powders, whether classic omnipod or dash, who convert over to Omnipod, five which is a little different than.
The tube pump market, I think which caused some upgrades and to be clear, we do not call conversions or upgrades new customers those are not factored into our new customer totals.
Because for US, it's an annuity model and so as people move from older products to new generations, we don't call them, new shipments or upgrades or whatever others in the market call them for us, it's just customers converting to the latest technology.
And where we're at and that is making.
Making great progress in fact, as Jim had in his prepared remarks overwhelmingly.
Success here with a lot of our existing customers wanting to move on to Omnipod, five and frankly put some of the stress on the system in the first couple of months and so significant conversions and we think Margaret that we'll be through most of them by the end of 2023, but just as a reminder, until we get a type two indication for.
Romney Bud five and maybe even after dash is still the product for type two customers and so we will still have quite a few dash customers on type two.
And those wont be converting over to Omnipod five.
So those are the major drivers of the volume benefit obviously, the single largest driver for US is new customer starts and we've had record new customer start quarters for some time in the U S. So that's the major driver of the volume benefit.
And then also as you mentioned retail pharmacies that is also a smaller component of the $50 million ramp benefit we called out here in the quarter as we start to stock retail pharmacies, Brett. So do you want to pick up with that one.
Yes Margaret.
<unk> talked about the 85000 or so retail pharmacies in the U S and we don't we don't report out on how many of those pharmacies have distributed omnipod, but we do get that information from <unk> I'll, just say, it's substantial but the reason that I don't think its that important because what's really important to me is how many.
Pharmacies to have access to Omnipod, five and can dispense omnipod five and the answer to that is really almost all of them because we've got a really good job building the channel out we've got product with all the major wholesalers and those wholesalers supply omni by five to the pharmacy. So.
As far as the 85000 retail pharmacies that are out there and how much omnipod is on the shelf, it's really not that much because when a position.
A prescription to a pharmacy, it's about 24 hours that a wholesaler will send omnipod to that retail pharmacy in most cases, that's how it's happening in some cases was retail pharmacies do stock omnipod when they know they've got regular omnipod customers picking up their product every month, but the channel is really strong and the reality is that most of those.
Pharmacies have the ability to distribute omnipod.
Our next question comes from Chris Pasquale from Nephron. Please go ahead. Your line is open.
Yeah. Thanks, Congrats on another great quarter, guys I was hoping you could provide some more detail on when you think you could RG seven integration is that something we should expect in the second quarter.
And then the lack of an iOS app has really been sort of an afterthought getting a successful <unk> launch has been that you've been working on it for a while now is that something we should expect.
In the next quarter or in 'twenty, three any clarity there would be great. Thanks.
Yeah.
Thanks, Chris for your question.
I'll start.
We're working really closely with our partners, both both decks com and Abbott on CGM integration.
Integrations are working really hard on June seven as you know we don't we don't give advance notice some timelines that we expect or anything like that I'll, just say that we're working really hard and we see them both as extremely important.
And we're very bullish on completing integrations across the icy GM spaces.
By CGM has become available on iOS at work continues to go really well same answer we don't we're not reporting on timelines, but that App is I think progressing really really nicely and as we have more news we will give it to you all.
Our next question comes from Kyle Rose from Canaccord Genuity. Please go ahead. Your line is open.
Hi, This is Cameron answer Kyle Thanks for taking the question.
Its full impact with pricing in 2023, including the upgrades of everyone to dash and O five and can you break that out from a volume mix perspective.
Hey, Caitlin it's weighted.
Not a metric that we break out.
As you highlight we do benefit from the premium in the pharmacy channel and that's largely driven by the.
The conversions, we have from the <unk> channel as well as new customers coming on through the pharmacy channel I'll, just remind everybody that part of the headwind that we have in gross margin is because we give the <unk> for no charge and so as we are significantly ramping up new customers here.
One of the impacts that the Omnipod five product cost.
<unk> gross margins, but having said that pricing is a smaller component of our revenue growth.
The far larger components are volume, including the initial volume ramp here with Omnipod five in this to script benefit that we're getting at the early stages here in the first couple of quarters.
So.
We don't break out that metric for you, but its something thats been positive for us and we think it will continue to be positive for us in the pharmacy channel.
Yeah.
And we have time for one more question it will come from Matthew O'brien from Piper Sandler. Please go ahead. Your line is open.
Great. Thanks for squeezing me in here.
Just this question might be for Wade Wade when I look at the U S. The absolute dollars in the U S.
Over the last couple of years here and I know Theres an adjustment for the stocking that we saw in 'twenty two about I think it was around 80 million Bucks Europe from 'twenty, one to 'twenty two about 150 million Bucks. When you net that out that $80 million out your 800 up to about 1 billion one.
1 billion won in 'twenty three C are up almost $300 million.
Okay.
Year over year, when you make those again those adjustments for stocking so what im trying to figure out is I know Q2 here was a monster as far as patient <unk>. In Q3, Q1 is going to be the same thing.
Just what does that imply as far as.
New patient adds on the MDI side, and you're clearly expanding the market what does that imply as far as market growth goes and what does that imply in terms of <unk>.
Competitive share conversion as well because it seems like there is an acceleration implied there as well to get there and then from an infrastructure perspective do you have everything in place manufacturing customer service to support the almost doubling of U S. Omnipod revenue over a couple year period.
Well I didnt leave a lot on the bone there Matt.
That's a broad question with a lot of areas to answer I think and I got to be honest I didn't follow the stocking math that you were doing there.
We don't have anything that we track in the order of magnitude that you were talking about there. So let me try to get at I think what the question is getting at which is.
How are we continuing to grow the business and in particular in the U S.
And because.
Because we don't have any one hundreds of millions normalization items that youre talking about from time to time, we will call out increases or decreases in the channel and so just to confirm for 2022, we had nothing in Q1 and Q2, we had $7 million channel increases we started to roll out omnipod.
Five and then here in the third and fourth quarter, we've called out this additional script benefit $16 million in Q3, 15 and Q4. So when you normalize for those we're talking about a 4% impact.
In the U S and so not to the orders of magnitude you were getting at but something that we certainly want to be aware of because most of that volume benefit is being driven by converting customers and just so everybody is aware of what this dynamic is that we keep talking about is as we launch omnipod five.
The new customer will get a starter kit, which is their personal diabetes manager as well as their initial order of pods and if they also get their first pharmacy script order. They will get say for example, two months in September So September they get there.
Starter kit and they get their first order what we're curious to see is how that would impact our second quarter of Omnipod five and what we did see is a good percentage of customers actually skip in order.
And in.
And use up those pods and so we did see a benefit as well again for people getting to scripts in Q4, and when you net the two of those out it was approximately $15 million and so that was our estimate if you again, if you normalize for those we're talking about a 4% impact and that's why we're calling it out if you go to the share question.
Part of your question and that was.
Are we taking share absolutely. There is no question that we're growing at accelerated rates in the United States way above market growth and has spread and Jim highlighted earlier in the call. We had a record number of competitive switches, which means in the past we used to get about 20% of our customers from competitive switches.
80% from multiple daily injection.
You see in the metrics, we provided here that's now 65% MDI, 35%.
<unk> switches both of those are record numbers record number of competitive switches record number of Mds.
Coming new customers, new to pump therapy coming onto our products. So we.
We do think that will be a share taker for some time to come we've talked about a lot of the things on the call. Today that we think are continued drivers of our business that keep us in a leadership position.
I'll probably leave it there Matt.
Look forward to catching up with you after the call and see if we can we can clear any other parts of your question.
Yeah.
We have a question from Steve Lichtman from Oppenheimer <unk> Company. Please go ahead. Your line is open.
Oh, Thanks, guys. Thanks for squeezing me in and congrats everyone.
You mentioned on DTC that you'll be putting putting the foot down here near term.
Can you talk a little bit about what your plans are there.
What form will it take when Youre planning on kicking that off in and do you see that as a particular opportunity once you get a type two label for Omnipod five thanks.
Yes, Steve Yes, Brett Thanks for the question.
I don't know if were putting the foot down, but we are starting to.
Use DTC for Omnipod, five and Youll start to see that.
Television, we've always been strong with social media digital advertising and now we will start TV with how many dollars five this quarter.
Haven't seen it already so youll start to see a little bit of that.
We will see how it goes.
As far as the type two opportunity goes.
We know there is an opportunity to create awareness for sure with type two but.
We'll see how that goes with a lots of basal pod, we have done DTC for type two with a focus on Medicaid Medicare free trial.
Things like that in the past with a dash product. So you won't see anything with <unk> five of course until we get a label won't see anything with basal pod and our focus this quarter will be DTC for Omnipod five.
This will conclude today's Q&A session I would like to turn the conference back to Jim Hollingshead for closing remarks.
Thanks Julien.
Hi, Ken sorry about that yes. This is Dan just before I close I just wanted to let everybody know that I would call to your attention that there was an error in the earnings release in the appendix in the adjusted earnings per share reconciliation one of the EPS adjustments should have been a reduction to EPS not in <unk>.
And therefore, I just want to let everybody know that non-GAAP adjusted EPS for the fourth quarter with 49 cents. Instead of the 55 has shown and we'll be issuing an update shortly.
So there is no change to adjusted EPS for the full year, it's correct Sean.
Hi, Jim go ahead.
Yes.
Ah.
Real time catch everybody. So I hope everybody stayed on the call long enough to get that update so thanks Deb.
And thanks, Julian for for Shepherding the call and more importantly, thank you everybody for joining US today. These are remarkable and really exciting times at Insulet.
And we are just getting started fulfilling our mission to improve the lives of people with diabetes around the world Omnipod five is clearly transforming the diabetes landscape and we continue to deliver strong financial performance and strengthen our global competitive position and thank you all and have a great evening.
Ladies and gentlemen. This concludes today's conference. Thank you for your participation and have a wonderful day you may all disconnect.
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