Q2 2019 Earnings Call
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, if anyone should require assistance during the conference.
Press Star then zero on your Touchtone telephone as a reminder, this conference call is being recorded.
I would now like to introduce your host for today's conference Ms., Deborah Gordon Vice President Investor Relations and corporate Communications Ma'am. Please go ahead.
Thank you Lori good afternoon, everyone and thank you for joining us for Insulates second quarter 29 feet earnings call. Joining me today are Shacey Petrovic, President and Chief Executive Officer, and Wade Mcmillan Executive Vice President and Chief Financial Officer.
A replay of this call will be archived on our web site and our press release issued after market close today discussing our second quarter 2019 results and third quarter and full year.
In guidance is also available in 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 involve known and unknown risks and uncertainties that may cause actual results to be materially different from any future results implied by such statements such risks and uncertainties. In addition to the inherent limitations of such forward. Looking statements include those referenced in our Safe Harbor statement in our second quarter earnings release and in the Companys filings with the FCC.
Please note that we assume no obligation to update these forward looking statements, even if actual results or future expectations change materially also unless otherwise stated all financial commentary regarding dollar and percentage changes will be on a year over year gafisa with that I'll turn the call over to Shacey.
Thanks, Deb and good afternoon, everyone.
The second quarter of 2019 was another important and exciting one for Insulet and we are extremely pleased to have made great progress on our strategic imperatives as we cross the midpoint of the year.
We entered 2019 from a position of operational and financial strength after working through out 2018 to solidify our foundation for long term sustainable and profitable growth.
We remain focused on our strategic imperatives.
First driving innovation across our business.
Second expanding market access.
Third strengthening our global footprint and fourth ensuring operational excellence throughout our organization.
Thanks to our disciplined focus on these imperatives and the teams great execution Insulet achieved another quarter of accelerated revenue growth.
As a result, we are raising our full year 2019 guidance.
Our market opportunity is large it is growing and it is underpenetrated.
Today, we estimate our addressable market in the countries. We currently serve.
10 million people living with type, one and insulin dependent type two diabetes.
Globally, both the intensive diabetes and the use of technology to manage the disease are growing.
These trends provide strong tailwinds for our business.
We have a number of near and long term growth catalysts, such as our new product innovation and global expansion, which will which we expect will both increase our addressable market.
And our penetration into that market.
These growth drivers will make us confident in our 2021 financial targets and our ability to drive continued long term growth.
On today's call I'll share financial highlights from the quarter and review the progress on our strategic imperatives.
I will then turn the call over to Wade, who will provide additional detail on our second quarter financial results and share an update to our 2019 outlook. We will then open the call for questions.
In the second quarter, we delivered $177 million in revenue exceeding our guidance by $12 million at the high end and representing a 43% increase year over year.
This was driven by 51% growth in our global diabetes revenue, including the one time benefit of our go direct strategy in Europe .
As we said last quarter after years in the making we had a significant number of initiatives coming to fruition in Q2.
Our team executed extremely well across all of them, resulting in our over achievement.
We continue to make progress across our core strategic initiatives and remain laser focused on improving the lives of people living with diabetes.
Starting with innovation and market access.
Since last quarter's full commercial launch of our next generation platform Omnipod Dash, we've had thousands of patients get started on dash.
Customer feedback has been superb.
In an internal survey of our first dash users approximately 90%, we're very satisfied with the ease of use of dash and wouldn't recommend dash to a friend.
The new Dash Pdm was designed as a mobile app on a locked down Android phone.
There is clear customer appreciation for how intuitive user interface is and how insulet has advanced toward our vision of customers being able to control their pod from their personal smartphone.
Dash utilization is growing commensurate with our work to establish access and reimbursement.
By the end of Q2, we had expanded U.S. coverage for dash to approximately 50% of all covered lives.
Also this quarter more than a third of our new Omnipod customers received dash.
And the vast majority of dash was shipped through the pharmacy channel.
We are working to continue to expand access in this channel because the pharmacy provide several advantages and a best in class customer experience for physicians and their patients and payers.
Our focus on this channel is delivering results. We ended Q2 of 2019 with 15% to 20% of our total U.S. customer base, receiving their pod through the pharmacy channel up from 10% to 15% previously.
There has been enthusiastic customer response on dashes innovative pay as you go business model Omnipod Dash is the only insulin pump with no upfront charge and no four year lock in period.
We believe it is game changing to remove barriers to adoption for our stakeholders and these efforts should drive more use of pot therapy.
Patients, who otherwise might not have afforded new technology because of upfront costs or industry lock in period can now choose omnipod.
Because of its simplicity low cost and low commitment physicians can feel confident recommending omnipod for more patients and earlier in the treatment pathway.
And on the payer side, we have reduced the risk and cost of member attrition.
There are early indications that our das strategy is paying off.
You asked patient demand and new patient starts are at all time record highs.
We have established significant market access in a relatively short period of time.
And physicians have told us they are now considering multiple daily injection users and type two patients for dash that they otherwise would not have recommended for pump therapy.
Thanks to its simplicity discretion and ease of use dash is showing to be a particularly appealing and valuable technology for people living with insulin dependent type two diabetes.
We have launched messaging and educational initiatives to ensure that physicians and patients understand dashes unique benefits for type two users and we expect this customer segment to continue to grow.
In addition to broadening access to Omnipod Dash, we continue to successfully secure expanded coverage for Medicare and Medicaid beneficiaries.
By the end of this second quarter, we expanded coverage to greater than 50% of all Medicare lives.
Up from just over one third at the end of last quarter.
And we ended Q2 with coverage for approximately 60% of all Medicaid lives up from over half at the end of Q1.
The foundation, we are building in terms of leveraging our powerful business model building access in the pharmacy and moving Omnipod off the treatment pathway will all be advantageous for Omnipod horizon when it launches next year.
We're making great progress with horizons clinical and product development and remain on track to start Pivotals in the fourth quarter of this year.
Omnipod horizon will improve glycaemic control with both hybrid closed loop and personal smartphone control.
Because horizons algorithm resides on the pot itself users will benefit from an on body waterproof system that keeps them in close loop without having to disconnect daily for activities like Beijing or exercise.
This is a crucial differentiator from traditional to pump.
It means that the pod is always in direct communication with the CGM.
Omnipod Horizon system architecture is designed to provide more time and loop and more time in range.
At June to American diabetes annual conference compelling data was presented on Omnipod horizon.
In which study participants children ages two through six were shown to spend significantly less time in hyperglycemia.
Spend significantly more time in the target glucose range and to have better overnight glycaemic control compared to their usual therapy, which included M.D. I and sensor augmented pump therapy.
During the study glucose control was maintained in the target range for 73% of the time overall and 85% of the time during the overnight period.
This is remarkable given the many challenges of maintaining proper glycaemic control for children. This young and it is a powerful early indicator of the impact horizon can have.
We are aware of growing off label use of the loop algorithm and while we cannot condone or support it we want to make sure that this system is well studied and safe and effective for a broad population of users. We are working with tide pool to get the DIY communities, Iowa based loop algorithm and automated insulin delivery system cleared by the FDA and commercially supported in the marketplace on Omnipod.
This system, which will be accessed through the App store for many users iPhone provides yet another level of convenience to insulin management.
This is additive to our internal Omnipod Horizon program and we are pleased to have the opportunity to support patient choice and the passionate and driven DIY community.
In addition to product innovation and market access we continue to focus on strengthening our global footprint and solidifying our leadership position outside of the United States, where the addressable market is large and growing.
Our direct operations in Europe have been in place for just over one year and as a result of the market insights. We have gained through our direct engagement with stakeholders, we are increasing our penetration in existing markets.
Some examples of the team's successes include France, where today the majority of all new patients starting pump therapy are choosing omnipod.
And the United Kingdom, where approximately 20 clinics are now prescribing omnipod regularly for the first time ever.
We also have been awarded new tenders that are broadening access to omnipod throughout our existing European markets.
We are well positioned to drive continued growth in our existing markets to expand into new geographies, where we see long term strategic value and additional opportunities for growth.
And to drive innovation, including the launch of Dash in 2020.
We will focus on the significant opportunities in our existing markets during 2019 and expect to begin to expand our global footprint in 2020.
And finally, turning to operational excellence and our new U.S. manufacturing.
In the second quarter, we began production on our first highly automated U.S. manufacturing line in Massachusetts.
While this ramp is a headwind to gross margin, we expect to realize significant efficiencies and gross margin expansion over the long term given the lower landed cost of production.
We remain on plan to install our second U.S. manufacturing line later this year and begin production in 2020.
This investment further supports our rapid growth provides manufacturing redundancy and supports efficiency efficient and effective technology transfer of our new product innovation into manufacturing.
In summary, we made significant progress on our strategic imperatives, including innovation, increasing market access strengthening our global footprint and ensuring operational excellence throughout in slot.
This focus and the teams great execution delivered another record quarter of revenue dollar growth.
In fact Q2 marked in flood fourth consecutive quarter of greater than 20% revenue growth and our fourth consecutive quarter of positive operating income and net income.
With that I will now turn the call over to Wade.
Thank you Shacey as Shacey noted at the beginning of the call. We had another strong quarter as we continue to execute across our strategic imperatives. We are realizing improved financial results each quarter by accelerating revenue growth profitably as we scale.
While remaining focused on carrying out our mission of improving the lives of people with diabetes through our innovative solutions.
In the second quarter of 2019, we had revenue of 177.1 million representing growth of $52.9 million or 43%, which was 12 million above the high end of our guidance range.
By product line Us Omnipod revenue grew 26% to 98.1 million, which was $7 million above the high end of our guidance range. This was the third quarter in a row of accelerating growth in the U.S., while managing the transition to pharmacy and the launch of a new product. This acceleration resulted from growth in our customer base driven by expanded market access and the launch of Omnipod dash, primarily through the pharmacy channel.
And the mix benefit of the premium from the shift to the pay as you go model.
In the quarter, we exceeded the high end of our guidance range because were able to successfully navigate through the dash launch and business model shift, including no charge pdm.
International Omnipod revenue grew 120% to 62.7 million exceeding the high end of our guidance range by 4 million, primarily due to growing demand for omnipod within our existing European markets and the benefit of our direct business model in Europe .
As a reminder, Q2 international Omnipod revenue growth reflects the final quarter of the year over year incremental 50% uplift in price in our European business from converting to a direct model. Additionally, we had an easier comparison in Q2 due to the negative impact from the inventory buyback when we transition from our former European distributor in the prior year.
Drug delivery revenue was 16.3 million a reduction of 8% and 1 million above our expectations.
Turning to gross margin, we delivered 65.7% in the second quarter down 30 basis points year over year, and 120 basis points sequentially.
As we communicated on last quarters earnings call, we guided to a sequential decline in gross margin in Q2, given the partial quarter impact of our U.S. manufacturing ramp.
As we increase production, we incur certain period costs, including training and startup costs as well as working through the normal inefficiencies of a new plant startup.
We expect these headwinds to continue for some time as we add future manufacturing lines and established the first manufacturing facility and capabilities for insulin.
Operating expenses were 61.4% of revenue and increased 40% over prior year.
R&D included an increase of 71.6% year over year as a result of accelerating investments in innovation and U.S. manufacturing period expenses prior to starting production. We ended the quarter with operating income of 7.6 million, representing 4.3% of revenue in line with full year expectations and net income of 1.4 million, representing just less than 1% of revenue.
We ended the quarter with 372 million in cash and investments compared to $393 million at the end of the first quarter and 430 million at the end of last year.
We generated positive operational cash flow, we continue to use cash for planned capital expenditures as we invest in our us manufacturing and supply chain operations.
In summary, we are pleased with the acceleration of revenue growth level of investment and profitability in the quarter and we're confident this momentum more curious through the second half of 2019, we are well positioned for continued revenue growth and profitability over the long term.
Next an update on our 2019 guidance as a result of our strong first half of the year and anticipated momentum through the rest of 2019, we are raising our guidance expectations for the full year by $25 million at the high end of guidance and 33 million at the low end. We now expect 2019 total revenue in the range of 700 million to 750 million representing growth of 24% to 27%.
By product line, we are raising our us omnipod revenue range to 391 million to 399 million representing growth of 21% to 23% up from our previous expectation of 376 million to $385 million. This reflects our confidence in the strong growth of our customer base given market access wins and record new patient starts.
We're off to a great start with our recently launched Omnipod dash product and this is fueling our already strong growth.
We continue to expect a pdm headwind of $6 million to $8 million for the full year, resulting from our no cost dash Pdm and expect this to neutralize during the year due to the mix benefit of new and existing users purchasing dash pods at a slight premium.
For International Omnipod, we are raising our revenue to a range of 246 million to 250 million representing growth of 43% to 45% up from our previous expectation of 236 million to 244 million.
This includes the higher year over year revenue growth in the first half of the year, resulting from the Q2 2018 inventory buyback and our higher than expected customer base growth this past quarter.
We continue to expect normalized growth for the year.
In the mid teens to low 20% for international product line.
We're in a great position to capitalize on our strong growth in our existing markets given our direct European presence.
Lastly for drug delivery, we're raising our revenue to a range of 63 million to 66 million, representing a decline of 3% to 8%. This has improved from our previous expectation of 55 million to 61 million.
For the third quarter of 2019, we expect to deliver revenue in the range of 174 million to 181 million representing growth of 15% to 20%.
This includes us omnipod revenue of 98 million to 102 million.
Representing growth of 20% to 24%. We also expect international Omnipod revenue of 61 million to $63 million representing growth of 22% to 26%.
Lastly, we expect drug delivery revenue of 15 million to 16 million, representing a decline of 15% to 21%.
For the rest of the piano, we're reaffirming that we expect our full year 2019 gross margin to be relatively consistent with prior year. This reflects the benefit of going direct in Europe , and continued operating and supply chain improvements and the mix benefit of the pay as you go model offset by headwinds from the ramp of establishing our us manufacturer.
We further expect gross margin for the second half of the year to be lower than the first half due to the impact of the U.S. manufacturing ramp during the remainder of the year and into 2020.
We also expect Q3 to be the lowest quarter in 29 team given the timing of period costs and ramp up within the year.
As most of you are aware, we are developing a core competency within within Insulet around operational excellence and best in class Global manufacturing.
It has a significant advantage to now have our own manufacturing operations co located with our innovation teams.
Manufacture a product of this complexity at scale is difficult to implement and also to replicate.
We are managing through the early ramp process and remain confident we will scale to our planned production levels to continue to serve our growing customer base.
We now expect 2019 operating expenses to increase approximately 25% up from our prior expectations of 20%.
Our change in estimate as a result of our higher revenue expectations for the year, resulting in a corresponding increase in associated variable costs and an opportunity to increase our investment in innovation.
We still expect to deliver full year operating margin in the mid single digit percentage range and we continue to expect capital expenditures to be relatively consistent with 2018 as we invest in us manufacturing to drive redundancy cost reductions and contributions to our margin expansion over the long term.
To wrap up we're proud of the team's successful execution of our strategy and the performance we delivered in the first half of 2019.
Looking ahead to 2021, we remain confident in our targets of $1 billion in revenue gross margin of 70% and operating margin in the mid teens, we have the right strategy and momentum to achieve these goals and insulin is well positioned to deliver long term sustainable growth and value creation.
Ill now turn the call back to Shacey for her concluding remarks.
Thanks, Wade I speak on behalf of the entire team when I say that I am excited about the opportunities ahead for Insulet.
Our financial outperformance in the first half of 2019 and continued execution of our proven strategy and sure. We are in a great position to continue our strong track record of shareholder value creation.
Now I would like to turn the call back to the operator for today.
Thank you ladies and gentlemen, if you have a question at this time. Please press. The Star then the number one key on your Touchtone telephone.
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And our first question comes from Jeff Johnson with Baird. Your line is open.
Thank you guys. Good afternoon, congratulations on the quarter in the quarter back news I guess so.
Two questions here.
One just on the mix of patients in the quarter Shacey are you seeing any any increase mixed T to obviously, a little bit easier through the pharmacy channel.
To get a tier two coverage with dash, so any change there or any change on a competitive wins versus MD I conversions.
Yeah, I think it's a great question, Jeff So the rate of competitive wins from Mds versus to pump pre study so still approximately 80% of our new patients coming from multiple daily injection.
Where we have started to see some early indications of.
What I think is it could turn into an exciting trend is that tight to mix in our new patient starts on dash. So there we have started to see a tick up and it's too early really to call. It a trend, but I think we are encouraged that our messaging and our focus on that population is starting to resonate with physicians and with users.
All right. That's helpful and then wait maybe a manufacturing question for you.
I don't want to read between the lines too much.
On some of your comments, but are we seeing anything we're manufacturing costs maybe.
A little bit higher than initially expected or would you say the started up in the ramp up costs are pretty much right in line kind of with how you are thinking and just to make sure what percentage of your US demand can you service out of the U.S. manufacturing facility over the next.
Six months to 12 months or I don't think theres any tariff issues to consider but I just want to confirm that thank you.
You bet Hi, Jeff So regarding manufacturing costs. They are right in line with our expectations, we have not changed our guidance for gross margins since the beginning of the year.
And so very much in line, what I would say is it makes it lumpy right as we managed through the volume and we have lot of scenarios running for volume between our legacy plant in China, and our ramp up of our new us manufacturing here and so as we work through that we have lots to deal with right. We have the period costs period expenses as we.
Initially started to ramp up and then inventory made and us manufacturing is.
At a higher cost because its absorbing a lot more overhead across a very small in the beginning small amount of volume and so we put more product in any into inventory at a higher cost. So it's going to take us a while to work through that it's going to be lumpy, but having said that were right in line with our expectations and the team has been working on this for several years, it's a big part of our strategy.
We get the redundancy from it we also get long term efficiency out of it and so it's just something that were going to have to work through here in the medium term.
And working through the financials, but at the end of the day, it's the right strategic move and then regarding U.S. demand, we won't be at full scale for us demand in the next six to 12 months it will take longer than that we'll have to get into our second line.
And that will come in 2020, and then last third part of the question if I caught it all was it regarding tariffs and the team's still is doing a great job mitigating the tariff impact to date, it's immaterial and that's why we're not calling it out to this point and I think like everybody. We're waiting to get the details on the latest round of tariffs and what exactly those mean, but I think the team has done a real nice job here of mitigating to date and then although obviously not part of the strategy for US manufacturing. It was driven by a redundancy and increased capacity for the team, but as it turns out once we do get to scale here in our us manufacturing facility will be able to serve the us from the U.S. and the tariffs won't be an issue at all so very happy with how our long term manufacturing strategy is coming together.
Thank you. Our next question comes from David Lewis with Morgan Stanley . Your line is open.
Good afternoon.
Congrats clearly an inflection quarter and Shacey I wanted to start with obviously the U.S. inflection is for people going to be focused tonight. So.
Would you just give us more detail shacey, it's hard for you to move your business. This quickly historically, but you did it. So when you think about the drivers. This particular quarter in the US is it greater access because of the pharmacies that just lowering access to getting on the system is enthusiasm around dash payer access.
It will be helpful. I just have a quick question for for weight.
Thanks, David and.
Really it is all of the above.
Yeah, I'd highlight the pharmacy as really helping.
You know to improve the customer experience at our strategic rationale for the pharmacy was that combined with pay as you go it would be a better customer experience.
And that and over time, it would be a more attractive channel for us and that you could lower barriers to adoption and so I think what you're seeing is clearly dash is an appealing product for patients and for that position, but this idea that physicians can now prescribed a product for a patient.
Without having to worry so much about locking a patient in for four years I really think that that's helping to change the way that both patients and physicians are thinking about omnipod and the visibility too.
Prescribing earlier, and maybe for a subset of patients that might not otherwise have done and just a little bit more color. We're starting to see that in terms of the complexion of our user base.
Starting to see more type two users certainly more Medicare age users to that.
Increased access there is also helping to expand the patient population. So it really is combine the strength of the product platform really the strength of the business model a pay as you go business model and then the increased access both in pharmacy and in Medicare and Medicaid helping to drive that.
That record new patient starts and.
Install base growth.
Okay very helpful. Jason and we just can you just give us the underlying ex us growth this quarter adjusted for inventory and direct gross up and any comparisons we should be mindful of as we head into the third quarter, which is really the first apples to apples quarter and as we should be thinking about second half ex us growth.
On an apples to apples basis, thanks, so much nice quarter.
You bet, Hey, David So.
The biggest impact for the Q2 growth rate and the sequential decline to our guidance is the can the process around converting to our distributor in Europe last year in Q2 and there is.
Basically boil it down into two big pieces, one on a positive note we had the 50% price increase from going direct and then also the challenge or disruption is moving through the direct process, where we had the buyback inventory as well as work through some some tougher.
Comps that were out there in.
In Q2 last year, which become an easy comp for Q2. This year. So if you put all that together normalizing it it's about a 90% to 100%.
In fact, David So you can think about work working from Q2 to Q3.
Down about 90% to 100% just for the international transition and other than that really we when you look at our guidance range at the high end, we're really anchoring that to the performance that we've had over the first half and so pretty strong growth and that's really across both us and all of US regions and then I think I would just add for Q3.
We're actually a little higher than we've talked about on a normalized basis. So we've said several times and again in the guidance. This quarter that we think the normalized growth rate internationally as high teens low twentys and looking at the guidance here for international were above that and there's a couple of reasons. There was a small hangover from the disruption in Europe last year that gives us a slight increase and then we've got good visibility into our pipeline in Q3, and it looks strong and so we took the momentum the strength of our pipeline and small impact of a slighter slightly easy comp compared to Q3 last year and that's what gets us to the 22% to 26% during Q3.
Thank you. Our next question comes from Robbie Marcus with Jpmorgan. Your line is open.
Oh, great for that thanks for taking my question and congrats on a really nice quarter.
Well, maybe you could help us understand kind of similar vein a question that David just asked on international but for the you asked if you strip out.
All the price increases that were seeing you said there was.
A good portion of patients that were getting a higher price dash in the quarter. What do you think underlying patient volume wise in second quarter, and how do we think about that for.
20.
Hey, Rob is still there we might have lost just the end of your question.
Hello.
Robbie solar.
Operator is still there I do apologize it looks like we did just lose the line of Robbie Marcus.
Okay.
We'll go on to the next question our next year, what do we do that that when Robbie comes back in queue. Please let us know and then we'll get this question perfect. Yes, Sir until then we'll take the next question from Joanne.
With BMO capital markets. Your line is open.
Good afternoon everybody.
Two questions.
The first one is the steps to the horizon launch.
You're talking about starting clinical trials shortly and then it sounds like it's still on track for the end of next year, how do we get from clinical trials to full launch.
Thanks, Joanne Yes. We are excited I think is is we've said with horizon, we're focused in three.
Areas. So the first is.
We're really focused from a development perspective on just ease of use and ensuring that we have a system that multiple daily injection users can transition to we're focused on phone control, which all the market research indicates is going to be a game changer for our users and then the third is we are focused on launching with the pediatric indication, which is why we are so excited about the data that was presented at EEI.
So the work that's left between now and Pivotals is to complete the commercial development of the product and then to enter into pivotal trials and achieve those those outcomes that were looking for.
We believe that we're going to benefit from the breakthrough devices designation at the FDA of an accelerated review and we are hopeful that because we'll have entered pivotals with the commercial system that we'll be able to either leverage that as a limited market release or I do at a somewhat protracted limited market release, and then move into full market release with the system.
So our goal is to be on the market in the second half of next year.
Thank you and then another question. This is such a small percentage of your revenue, but I did want to ask about drug delivery with a little bit better or less worse.
You look at it.
Something just to call out there or just normal course of business.
It's the normal course of business are.
Guidance for and performance for drug delivery is always based primarily on the forecast from our largest customer. So that's that's what that reflects both from a guidance and performance standpoint.
Thank you and Robbie Marcus has rejoin the queue. Our next question does come from Robbie Marcus.
Morgan Your line is.
Thank you and hopefully the second time will be a little better.
Wait I, just I don't know how much you heard but I just wanted to ask kind of like what David asked on underlying volumes in international growth, We know that dash comes at a higher price.
Without the PD.
It appears that there was a substantial portion of your underlying base that upgrade at ash.
That didnt need to get a pdm. So is just pure price increase year over year can you help us understand what the underlying patient volume growth wise and how to think about the installed base growth for 2019, I know you gave a metric in 17 and 18 just help us understand that this year.
Yes, you bet Robby glad to have you back so.
The customer growth that is not significantly different than what we experienced overall and a reminder for dash, it's a new product and so for people coming on to dash.
For the first time, our new patient starts there isn't a price increase so as you mentioned, we are getting some mix benefit and on the premium of existing customers that move from another channel into the pharmacy, and so where we don't have to give them a pdm and so when you net all that out we believe that our other pdm headwind as well as the benefit from it was just a slight unfavorable for the quarter and really not a material impact on our results. So netting the pdm headwind with the benefit of the mix and people moving onto dash in pharmacy and so.
I think you can think about our growth rate as not significantly different from our overall customer growth plus the mix or premium benefit of people moving onto or new patients onto dash that we didnt previously have because they're not moving from a from another product. So we don't have a price increase on those.
Great and then if I think about guidance and the balance of the year it seems like.
Headwind from the loss Pdm and the benefit of dash are offsetting each other to a degree.
I don't know if you've commented on if there's any stocking in the pharmacy when I look at guidance for the balance of the year. It does appear to have.
These accelerating trends from the second quarter. So just help us understand the underlying volume growth is pretty reflective of the second quarter results.
New patient starts don't have a huge benefit and each individual quarter help us understand what gets you to the slower growth in the second half. Thanks, a lot sure. Yes, you bet well, there's a lot there Ravi so work through it let me know if I Miss any of it.
So regarding the Pdm. So we had a pro rata, we talked about a pro rata amount over the three quarters Q1 to Q4 as I mentioned, we had a slight unfavorable in Q2 were assuming the same for Q3 and then we're still planning for a net neutral across 2019, so that assumes that as we accrue more patients in the pharmacy on dash that we will start to offset the pdm fully here in 2019 and on a net basis for 2019 be neutral.
So from a guidance standpoint.
If you look at the high end of our us growth rate for Q3, 24%. That's the same growth rate as we've had in the first half. So the way we're thinking about it is if we continue with the acceleration that we've seen in the first half we'll end up at the high end of our guidance. If we end up growing more or like we did last year in 2019, which was still accelerating and doing very well, we'll end up more like at the lower end of our guidance range. So it's really just thinking about how we've been accelerating through 2019 and how we're accelerating here in the first half of 2019 and.
At either end of the of the spectrum. We believe its strong growth having said that we have a lot of things we're working through Shacey talks a lot about years in the making what we just had one quarter of managing through a new patients.
A new product launch as well as our shift in our business model and the U.S. teams are doing an incredible job here.
Just working with them here for the past few months and seeing all that they're doing in the us, but they're also sharing capabilities and helping our.
Our European teams build capabilities in ramp up and then obviously getting pulled into us manufacturing and all that has to happen to make our us manufacturing run. So this is an incredible amount of things happening here at the same time and very proud of the team and how we work through it and actually exceeded our expectations here in Q2. So that's what gives us confidence that we can hit the high end, but also just being realistic that we're working through a lot of things and frankly, if we end up at 20% in the us at the low end of the range that will still be above what we did all of last year and 2019.
Thanks, again and nice quarter.
Thanks, Rob.
Thank you. Our next question comes from Danielle Antalffy with SVB.
Your line is open.
Hey, good afternoon, guys. Thanks, so much for taking the question congrats on a really great quarter.
Just a follow up question as we think about.
The shacey to follow up on your commentary around better customer experience with dash et cetera.
Can you talk about what that could mean or maybe you already have some sense of what that has meant from an attrition perspective have you seen the needle start to move there where do you think that can ultimately go overtime with dash and also I guess the farm is going through the pharmacy.
Daniel I think it's a great question and it's something we've been monitoring closely we actually predicted that as we lower barriers to get onto the product that we could see attrition ticked up and on balance.
All of our analysis and demonstrate to US if that was the right decision because we were ultimately going to grow the customer base.
And even if we end up with a slightly higher attrition rate, we'd be able to grow the customer base at a higher rate. There is no evidence this quarter that the attrition rate was higher and so what we're seeing is early indications that our expectation that the customer base would grow at an accelerated way because of dash and the business model. Both how appealing the product was but also just how differentiated the business model was so I think our early indications are good that we were right about the business model attractiveness I think we're going to be watching the attrition rate very carefully just to see what happens as we lower these barriers to get onto the product. So stay tuned on that front, we'll certainly provide color as we get it.
Okay, and then just one quick follow up we'd probably this one's for you.
Lots of transitioning from a manufacturing perspective, where are you guys at all supply constrained here in the quarter and did that have any impact on on sales was a headwind you might may be actually could have done better.
Hi, Danielle no. We're in really good shape from a supply standpoint, and Thats part of the redundancy plan here in fact heading into the Dash launch, we built inventory and heading into the act in manufacturing ramp up we built some inventory just to make sure. We're ahead of it. So we're feeling very good about the situation we're in.
From a manufacturing and supply standpoint.
Thank you. Our next question comes from Matt Taylor.
Hi, Thank you for taking the question.
Just wanted to ask one question.
About horizon, just wanted to make sure that you are still targeting late 20, I don't know if you said that today and when you think about combination systems can you talk about your plans or ability to drive to other combination systems with other sensors in the future with the designation.
Sure. Thanks, Matt, Yes, I did confirm that we still plan to be in the market in the second half of next year and we're on track to enter Pivotals at the end of this year.
And so I'm very excited about that progress.
We do fully expect our system to be interoperable and it's one of.
The rationale behind partnering with tide pool that.
We have a system that can work with other algorithms other sensors et cetera. So we see the value in inter operability and are planning for that down the road.
But at this point our partners Dexcom and we're very excited about the value of horizon with the Dexcom partnership their sensor, which is terrific and phone control.
Thank you could you just talk about the trends that we're seeing in the pump market more broadly.
Your competitor was talking about the accelerating trends clearly you've had very strong growth here too.
Can you talk about what you think the underlying growth for the market is and how that can be sustained over the next couple of years as these new technologies coming out.
Sure.
We always say that the pulp market is growing and it has accelerated in the last few years in part due to accelerating adoption of CGM.
And.
As CGM has grown that's been terrific for us because what happens is and no patients get visibility to their glucose trends. They recognize that there are opportunities to get better control and then they look for tool to get better.
Tighter control and Omnipod is obviously, a big piece of that so the increasing adoption of CGM has certainly helped to fuel the overall growth of the pump market and in particular Omnipod has been a big part of that too because the other thing that CGM does is get a patient comfortable with a wearable.
And so thats one of the hurdles to Omnipod adoption that CGM growth has helped to address and of course, you know the vast majority of our patients are coming from multiple daily injections. So overall, we're helping to grow the category. We believe in the United States that the market itself is growing somewhere around a 10% CAGR.
And outside of the United States in the markets that we compete in which are primarily these more mature European markets, it's growing somewhere less than that somewhere between five and 10%.
So nice growth overall, and obviously, we're getting a bigger share of that.
Of that market.
Thanks.
Our next question comes from Margaret.
With William Blair. Your line is open.
Hey, good afternoon, everyone. Thanks for taking the questions first off thank you guys for all the helpful metrics on the front end the call.
That was helpful.
Maybe just to follow up on some of those as you guys have gained some of the new coverage for dash or 50% now I think is what you referenced should we assume that these are all under pharmacy and inclusive of the type two patients.
And then as we see kind of that mix benefit start ticking up higher why shouldn't we see that continue to benefit numbers.
If you are about 15% to 20% of patients on pharmacy today.
Thanks, Margaret So dashes covered both under pharmacy Endear me, but the vast majority of the coverage today is through the pharmacy. So obviously, we've spoken in the past about the reduce barriers for adoption in the pharmacy, particularly for the type two patient and so that's true for the vast majority of the coverage that we established for.
For dash users in the pharmacy.
In terms of.
You know acceleration of adoption I would expect that dash and adoption will accelerate commensurate with the establishment of access and we started to see that already.
So as I think Ravi mentioned earlier it takes a long time for us to move the needle on the overall base, but we're seeing indications already in new patient starts where we obviously ramped access throughout the quarter, but we landed the quarter in a third of our new patient starts.
Being dash and so thats, an indication of kind of an early indicator of where adoption is going.
So thats exciting from our perspective I think the early indications are very strong.
Okay and part of the question was kind of understanding the revenue model because as you guys get that mix benefit maybe going from one channel and maybe having more direct control that patient yourself.
And maybe moving some of the existing installed base into that channel.
Why shouldn't we continue to see that again going into the second half of this year and into next year and then just kind on a type two side any kind of update of your coverage there.
With any notable changes maybe either that happened this quarter going forward. Thanks.
Yes, I think I think we would expect to see that continue to grow in that tailwind as we head through the rest of this year and going forward as we transition into the pharmacy that was part of the strategic rationale, but it was a more attractive channel for us for the patient for the physician et cetera, and the same thing is true for type two which is why I shared that in my opening remarks that we expect that population to continue to grow as we established access in the pharmacy.
That is a great channel for people living with type two insulin dependent diabetes to access omnipod and so as we establish more axis. There, we do expect that population to grow as well.
Thank you. Our next question comes from Jayson Bedford with Raymond James Your line is open.
Hi, Good afternoon, just a couple of Quickies here I wanted to ask about.
This growth is there any way you can comment or quantify the number of new prescribers, meaning.
An expansion of the prescriber base, if that is indeed, a source of the faster growth you're seeing.
Thanks, Jason we don't we haven't shared that in the past I will say, we track of both new prescribers are new clinics as well as penetration into our existing clinics and both are increasing significantly. So we are getting.
I guess to put it in a more colloquial term are getting more same store sales and more newstar sales both across the board.
Okay.
And then when do you expect to file for these designation.
We haven't shared that we have said that we fully expect to take advantage of.
That pathway, but for us it's really not.
Necessary until we have additional sensors.
You know that our I CGM. So we're not in a hurry, but it is part of our strategy.
For both at title and likely horizon.
And our next question is from Ryan Meliker with Cowen Your line is open.
Hi, good afternoon, thanks for taking my questions.
Maybe just starting with installed base growth do you still expect us installed base growth and 2019 to be consistent with revenue growth and similar question for international I guess, given the higher second half guidance.
Do you now expect the international installed base to grow at least in the low twentys per year or is it still in that range that you mentioned previously.
Sure. Yes. So this is what I consider Ryan the we're assuming that the installed base is growing similar to the overall sales growth rate and it's a bit of a tough number to gauge right now because it bounces around a little bit but at this point, we don't see a significant deviation and just one clarification there is.
I think a lot of people think about the.
Change in pricing in dash, but for people, who are new to dash that were not on a product before it's not a price increase because they are new to dash and they're not moving from anything so.
Although we are getting.
Premium for the pod in the <unk> with dash because it's in primarily in the pay as you go model that that that is an uplift to our overall.
Average selling price, but it's not a price increase for us.
From an international standpoint, we think its going to the customer base should also grow in that high teens, low twentys growth rate and so thats our expectation as the primary driver for growth in the region.
Great. Okay, and then just sticking with international.
You talked about starting some some new market expansion in 2020, it doesn't sound like there will be any major new markets, but how should we think about that maybe.
That incremental growth off of that high teens to low twentys base that you've talked about could it be significant or should we think of that as only a slight incremental benefit to 2020. Thank you.
Thanks, Ryan Yeah, I think for US the business model is all about the long term so any one market in any given year isn't going to be a major contributor at all it's really all about retaining and building that business and that customer base over the long term. So we really want to be thoughtful about that.
I wouldn't expect it to be a significant contributor at all in 2020, it's really about the long term story and how that can contribute over a number of years.
Thanks.
Our next question comes from Robby.
Capital Your line is open.
Hi, great. Thank you can you hear me okay.
Yes.
Hi, great. Thanks for taking the question Shacey just one question on type two and then I had a follow up for weight. So.
On the type two commentary that you mentioned can you just help us think about do these patients have the same reorder patterns as type one and kind of how does this early success it seems.
Fit into your strategy with some of the more concentrated insulin delivery systems that you're working on.
Yes, I think it's a great question, so theres, no indication really that utilization or reorder patterns.
You know differ with type two insulin dependent patient versus type one but again, it's really early days. So we're just starting to see indications of.
Strength in this patient population in our new patient starts as we gather a larger base over time, we'll learn more about utilization and retention and.
Reorder patterns in that base as it relates to our concentrated insulin is making great progress. There I think we had mentioned either 80 air the last call that we have submitted U 500 to the FDA.
And that has never we never really intended that to have a major contribution to revenue it's more of a niche product.
You 200, probably has more potential but we have also been saying for about a year now that market research and now this early experience with dash is showing us that.
Concentrated insulin will be helpful, but definitely not required to see significant growth in the type two insulin dependent patient population and in fact with omnipod the ability to reduce the total daily dose of insulin and with how appealing the product is from a simplicity and discretion standpoint.
We probably have access to the majority of people living with insulin dependent type twos, and we're certainly making an effort to.
To demonstrate the value of this technology in that patient population today and not wait for concentrate and funds are those come to market.
Great. Thanks, and then Wade if just one for you just maybe a little bit accounting way wonkish, but just curious as you kind of flow through the pdm or give that away or phase that out just curious how should we think about.
A warranty expense associated with that and is that built into your kind of.
Three year targets around that 70% gross margin approaching or is that incremental upside. Thanks.
It is built in and we would assume depending on the experience level. So as our experience levels change than we change our warranty accrual, but we wouldn't see it as.
Upside or a benefit because we accrue the warranty at our cost of goods sold and that's still what we're what we're issuing the product that so we don't see a change to the warranty.
Materially as a result of the new of new product unless our experienced factor changes on the new product in its early days on that so we don't have a an updated estimate.
Thank you. Our next question comes from sure Raj.
Northland Your line is open.
Good afternoon, everyone. Thanks for taking my questions.
And congrats on a nice quarter Shacey.
Let me start out with.
With 80.
And one of the things that Doug.
Yeah, so the fundamental level, we all kind of.
Try to understand the competitive advantage rendered with any of the closed loop systems.
T. IR for things control like he was 71.
You guys have preliminary data at 73, Medtronic seems to be in that ballpark.
I guess, where I'm headed Shacey I would love to get your thoughts what you think.
And this was also raised with last year's ATP, you know about the clustering and.
And the relative lack of advantages I'd love to get your thoughts what do you think is the key thing that needs improvement is at the pump.
Because you did mention the architecture of Omnipod.
Is it the algorithm or is that the CGM wages.
This seems to be a disconnect somewhere in terms of one system breaking free from the remaining.
Thanks for the question as Raj I would say that 73% time and range, especially in children, which is a very very challenging population ages two to six and that's a remarkable improvement from average time and range today. The average person living with type one diabetes I think is sitting in the fortys.
Maybe 50% time and range. So this is a marked increase that automated insulin delivery and the addition of great sensors and algorithms and great pumps are bringing to the community and it will make a difference in terms of outcomes and quality of life. When I think about a breakthrough system actually would come down to ease of use because all of these systems in well controlled clinical trials are going to deliver great outcomes, but what's going to actually deliver great quality of life and great outcomes in the real World is just how easy. These systems are to use and Thats one of the reasons why we focus so much on the Mds our user on ease of use and on phone control, which we think can help drive more adherence more convenience in more ease of use so that's really where we focused and where we think we can get a differentiation and kind of breakthrough to use your words.
Got it and finally Shacey in terms of I know a number of comments were made a third of the patients who please correct me if I Miss or a third of the new patient starts had dash.
The other thing I heard was the number of dash patients work T. twos.
Can you parse out.
What.
Person to see a new patient adds were key ones versus tier twos.
I guess, just trying to put our arms around.
The current penetration of key ones in the U.S platinum, obviously give some numbers medtronic be no I'd love you guys. We have some rough idea, but I'd love for you guys to parse out keywords, T. twos and see the level of penetration, especially within Ti ones. Thank you for taking my questions and congrats on a great quarter.
Thanks Raj, Yes, we can we don't break that out but I will say that this was a as I mentioned just an all time record high for us in terms of new patient starts and so we did have great adoption across both type ones and insulin dependent type twos. It was just notable in the dash population that teachers had picked up significantly in.
In new users and that was an interesting leading indicator, we're going to tell everybody if it turns into a trend.
Thank you and I'm not showing any further questions at this time I would now like to turn the call back over to Ms.
Patrick for any further remarks.
Thank you and thanks, everyone for joining us on today's call. We are building just great positive momentum from a strong start to the year and delivered better than expected results in the first half of 2019 and now expect a stronger second half finished none of this progress would be possible without the tremendous insulet team around the world, who work day in and day out to improve the lives of people living with diabetes. Thank you all for your hard work and dedication to our company and to all of us impacted by diabetes with that I look forward to updating all of you on our continued progress in the months ahead, thanks and have a great evening.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude todays program and you may all disconnect everyone have a wonderful day.