Insulet Corp Q3 FY2022 Earnings Call

Good afternoon, ladies and gentlemen, and welcome to the Insulet Corporation Third Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct the question-and-answer session, and instructions will follow at that time. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Deborah Gordon, Vice President of Investor Relations.

Thank you, Dilem. Good afternoon, and thank you for joining us for Insulet's third quarter 2022 earnings call. With me today are Jim Hollingshead, President and Chief Executive Officer; Wayde McMillan, Executive Vice President and Chief Financial Officer; and Bret Christensen, our Executive Vice President and Chief Commercial Officer, who is also with us today for the Q&A portion of our call. Both the replay of this call and the press release discussing our 2022 third quarter results and 2022 guidance will be available on the Investor Relations section of our website. Before we begin, I would like to inform you that certain statements made by Insulet during the course of this call may be forward-looking and could materially differ from current expectations. Please refer to the cautionary statements in our SEC filings for a detailed explanation of the inherent limitations of such statements. We’ll also discuss non-GAAP financial measures with respect to our performance, namely adjusted operating margin, adjusted EBITDA, and constant currency revenue, which is revenue growth excluding the effect of foreign exchange. These measures align with what management uses as supplemental measures in assessing our operating performance, and we believe they are helpful to investors, analysts, and other interested parties as measures of our operating performance from period to period. Additionally, unless otherwise stated, all financial commentary regarding dollar and percentage changes will be on a year-over-year reported basis, with the exception of revenue growth rate, which will be on a year-over-year constant currency basis. With that, I’ll turn the call over to Jim.

Thanks, Deb. Good afternoon, and thank you for joining us. The third quarter marked a continuation of our strong revenue performance, new customer growth, and strategic progress. We increased our full year revenue outlook, and the entire Insulet team continues to execute at a high level and advance our mission. We're focused on finishing the year strong and carrying sustained momentum into 2023. In Q3, we achieved several notable milestones. We once again delivered record U.S. and global new customer starts, which helped us achieve a remarkable 42% year-over-year growth in the U.S., our highest U.S. revenue growth rate in at least a decade. This was driven in large part by an incredible start for our U.S. full market release of our revolutionary Omnipod 5 automated insulin delivery system. The feedback on Omnipod 5 from our Podders and their caregivers continues to be fantastic. And of course, we are far from finished. We continue to work to expand access to Omnipod 5 as well as increase the total addressable market for our Omnipod platform. During the quarter, we expanded Omnipod 5's indication down to H2 and secured CE Mark. We also continue to drive growth with Omnipod DASH, both in our international markets and in the U.S., especially in the type 2 diabetes market. Building on that, we are incredibly excited to announce that we have developed and will soon submit a 510(k) for a new basal-only PODD to accelerate our future growth in type 2. It's a clear indication of our commitment to further innovate for people with diabetes and expand our addressable market, and I'll share more about this in a few moments. We could not be more excited about what's yet to come for insulin and our customers. The market enthusiasm for Omnipod 5 is greater than even we anticipated. Demand is coming from all across the market. Our core target market of MDI users is growing ahead of our own forecast and continues to be the greatest source of new customers for us. But we are also seeing significant increases in customer conversions. Current Omnipod users are converting to Omnipod 5 at a much higher rate than we saw with previous product launches, demonstrating that even current Podders see Omnipod 5 as a breakthrough offering. In addition to those coming from MDI, we are seeing significant volumes of customers converting from tubed pump technologies. And in many cases, we are winning back customers who had once been Podders. Thousands of people are returning to us and adopting Omnipod 5. And this strong demand also comes from all age groups. We achieved record new customer starts with both adult and pediatric users. In Q3, after only two months of its full market release, Omnipod 5 represented over 80% of U.S. new customer starts compared to over 25% in Q2. This validates the power of Omnipod 5 and the competitive advantages it offers. It is the only tubeless AID system with an adaptive algorithm that works as designed right out of the box, delivering high time in range. The algorithm then learns from each patient's specific usage and automatically personalizes care over the first two or three pods. Because of that personalization, we are seeing consistent reports of increased time in range, reduction in A1c, and markedly low hypoglycemia. It is the combination of clinical effectiveness and our unique Omnipod platform that is fueling our success. As a result, our historical 80-20 mix of those coming from MDI and traditional tubed pumps is changing. In Q3, we saw an estimated 60-40 split due to significantly more competitive takeaways. We're excited by our early progress and are gratified to see how Omnipod 5 is transforming diabetes management. We have long believed that superior innovation, offering simplicity, discretion, and improved outcomes will drive adoption in our large under-penetrated markets. Omnipod 5 is demonstrating this to be true. Omnipod 5 offers more than any other AID system on the market, including a number of market firsts. It's the first pod-based AID system, the first fully compatible phone-controlled AID system, the first system that no one has to plug in to access data, and the first AID system with a predictive algorithm, our smart bolus calculator, that directly incorporates not just blood glucose levels, but also blood glucose trends. And the stories are inspiring. We recently heard from a health care practitioner who has patients on Omnipod 5, several of whom called her related about the dramatic improvements in their diabetes management. This healthcare practitioner said she and her patients are amazed with our system. And for the first time, they have been in range 100% of the time. They called their experience 'life-changing'. It's clear Omnipod 5 is making it easier for our customers and their caregivers to manage diabetes, and it's simplifying the interaction between patients and their HCPs. We expect Omnipod 5's contribution to further accelerate growth as we gain additional market traction and increased commercial coverage. To that end, we've made significant strides with access. By the end of Q3, we secured coverage for over 80% of U.S. covered lives for Omnipod 5, well ahead of our initial expectations. We have also experienced a few challenges that we are hitting head-on. The incredible market response has placed pressure on our onboarding capabilities, particularly incoming call volumes. Additionally, the voluntary medical device correction we initiated last month for our Omnipod DASH personal diabetes managers in response to the battery issue we identified also slightly elevated call volumes. Given this, we are in the process of carefully reviewing the early field data on the Omnipod 5 controller to ensure it meets our high expectations for safety and user satisfaction. We have received a few inbound calls highlighting a potential issue related to charging the controller. Our work is ongoing and if we ultimately decide to take a particular action, you can expect it to be swift and transparent. Every single aspect of the Omnipod 5 experience is important to us. We are investing to increase our onboarding and call center resources, and are already seeing significantly improved response times. We're driving customer growth through our access and awareness efforts. We have a differentiated business model and a unique leadership position in the U.S. pharmacy channel. Both make access to our technology extremely simple, efficient, and affordable, which further differentiates Omnipod during challenging economic times. We have long focused on improving functional access for our customers. As a result, the vast majority of our U.S. customers continue to pay less than $50 a month through the pharmacy channel for both Omnipod DASH and Omnipod 5, and the average co-pay is less than $50. Consistent with our commitment to drive expanded access, we are proud to offer our technology at a similar cost to multiple daily injections while also delivering improved outcomes and quality of life. We also remain focused on the benefits our model provides to physicians and payers. Our pay-as-you-go model makes access easier and more affordable for customers while also eliminating lengthy lock-in periods. At the same time, it provides a superior value proposition and is less expensive for payers. We eliminate the large upfront costs that are common in the durable medical equipment channel with traditional tube pumps, which make those offerings far more expensive, especially since individuals in the U.S. change insurance plans every couple of years on average. In addition to growing our strong position in the type 1 market, our initiatives are also key drivers of our leadership in the type 2 space. People with type 2 diabetes are becoming increasingly comfortable with an on-body tubeless device, and we offer an unmatched user experience with Omnipod DASH and classic Omnipod. We were pleased with the recent local coverage determination proposal that would provide CGM coverage for basal insulin patients. This proposal, if approved, increases access to CGMs. At the same time, CGM awareness is rising, and we are well positioned to capitalize on this market expansion opportunity. Today, we're a leader in the type 2 space, and now we are taking this a step further with another novel innovation. We have developed a version of Omnipod specifically designed to treat type 2 patients on basal-only therapy, which we plan to submit to the FDA in a few days. It should greatly improve both the user experience and adherence by completely removing the use of needles. It is the perfect product for people with needle phobia and others who may struggle with adherence to daily or weekly injections. The total addressable market for our basal-only pod is estimated to be approximately three million people in the U.S. alone. It leverages our unique Omnipod platform, including auto insertion, comfortable wear, and affordable access through the U.S. pharmacy channel, creating a winning first-of-its-kind product for this population. The basal-only pod is incredibly simple to use and requires no controller or phone application to deliver a fixed rate of rapid-acting insulin for 72 continuous hours. This new innovation allows early entry into the type 2 treatment pathway, gets patients comfortable with Pod Therapy, and creates a clear pathway for them to adopt other Omnipod product offerings as their insulin needs evolve. Pending regulatory clearance, we plan to begin U.S. commercialization in 2024. Our basal-only pod is expected to drive TAM expansion and revenue growth for years to come while further improving the lives of people with diabetes. This innovation builds upon our leadership position in the type 2 market. During the third quarter, individuals with type 2 represented an estimated 15% to 20% of our U.S. new customer starts. As expected, this percentage is declining given our success driving Omnipod 5 adoption in the type 1 market. However, we remain confident that the simplicity of our Omnipod 5 platform represents a significant competitive advantage that will allow us to expand our customer base in both the type 1 and type 2 populations. As a reminder, like all AID systems, Omnipod 5 is currently indicated for use only for people with type 1 diabetes. However, the number of individuals with type 2 adopting Omnipod DASH remains very strong. Serving the type 2 population is a priority for us, and we are confident the combination of our form factor, access model, and innovative product portfolio will continue to drive customer adoption. Another area of focus is advancing our clinical efforts. Our Omnipod 5 randomized controlled trial is progressing well. We're on track to complete enrollment of 120 participants in the U.S. and expect to soon begin enrollment of up to 80 participants in France. We believe the results will demonstrate Omnipod 5's benefits compared to non-AID pump use with CGM. We are confident this will strengthen our position to secure broad reimbursement and pricing for Omnipod 5 in our international markets. As I mentioned, we were excited to receive our expanded indication down to age two for Omnipod 5. We are a leader in the pediatric segment and are confident Omnipod 5 will truly change the lives of these young children and their families. Based on our positive Omnipod 5 type 2 feasibility study results, I'm happy to share that we expect to begin a type 2 pivotal trial for Omnipod 5 in 2023. We continue to advance our robust innovation pipeline, with a focus on future AID offerings as well as building our digital and data capabilities. Our iOS integration work is ongoing, as is our development work to integrate Omnipod 5 with DexCom's G7 and Abbott's CGMs. We remain committed to building on our product offering and also providing CGM of choice to our customers. Our investments in R&D and innovation are a strategic priority that we fully expect will drive sustainable long-term growth and continued value creation. Our priorities in this area are clear: complete integration with our CGM partners, grow our global addressable markets, and create digital and data-driven products to simplify diabetes management for both customers and caregivers. One especially important feature Omnipod 5 offers is real-time usage data feeds. This simplifies diabetes management for patients and their physicians. Looking ahead, we will be in a strong position to use that data to further enhance the patient experience, improve workflows for physicians, and build on our competitive advantages. Moving to our international operations. We were pleased to receive CE Mark for Omnipod 5 in September. This represents a major step in our path to deliver Omnipod 5 to people globally. We remain focused on building the necessary cloud-based infrastructure needed to deliver the Omnipod 5 experience while ensuring compliance with local data protection regulations. At the same time, we're developing country-specific launch plans and continuing our work to drive premium reimbursement. We expect to enter our first international market in mid-2023. Given our planned stage approach, we will roll out Omnipod 5 more broadly throughout 2024. Lastly, our global manufacturing capabilities support our long-term growth trajectory and serve as another competitive moat. Global supply chain and macro-related headwinds remain, but we are addressing the needs of our expanding global customer base and supporting the adoption ramp of Omnipod 5. Our team has secured components and built products ahead of our forecasted capacity needs. While this results in increased costs that impact margins, they are necessary to deliver uninterrupted products for our customers. Although our U.S. manufacturing will continue to be a headwind to gross margin given the higher production costs, over the long term, we are confident all of our sites combined will continue to deliver the highest quality product and gross margin expansion. Our U.S. manufacturing has allowed us to build redundancy, capabilities, and gain key learnings that are driving efficiency, quality, and productivity improvements across all our facilities. In closing, we once again achieved notable financial, commercial, and operational milestones and are focused on finishing the year strong. With our customers at the center of everything we do, our entire Insulet team is executing our global mission and strengthening our foundation for sustainable long-term growth. I will now turn the call over to Wayde.

Thanks, Jim. Q3 marked another record-breaking quarter. Our global team continues to execute at a high level, and Omnipod 5 is proving to be a life-changing new option for people with diabetes. We're focused on finishing the year strong and entering 2023 with momentum. We generated 29% revenue growth in the third quarter finishing above the high end of our guidance range, driven by total Omnipod growth of 30%. On a reported basis, for total revenue, foreign currency was a 480 basis point headwind compared to Q3 of last year. U.S. Omnipod revenue growth was 42%, exceeding our guidance range. Revenue growth continues to be driven by the compounding benefit from record new customer starts and increasing volume through the U.S. pharmacy channel. This includes a growing contribution from Omnipod 5 and a premium for the pod, given we provide the PDM at no charge in the pharmacy channel. Growth in the quarter included an estimated $16 million benefit associated with the initial quarter of Omnipod 5 volume ramp. This was primarily driven by conversions from Omnipod DASH and Classic Omnipod, where we benefited from some customers getting both their starter kits and first refills in the quarter, as well as some initial stocking in retail pharmacies. Omnipod 5 and Omnipod DASH new customer starts combined were over 95% of our total U.S. new customer starts, comprised of Omnipod 5 at over 80% and an Omnipod DASH at almost 15%. In addition, pharmacy channel volume increased to almost 75% of our total U.S. volume. International Omnipod revenue increased 9%, within our guidance range, driven by Omnipod DASH adoption, partially offset by ongoing AID competition. On a reported basis, foreign currency was a 1,440 basis point headwind over the prior year, which was approximately 140 basis points unfavorable compared to our prior guidance. During Q3, our estimated global attrition remained consistent and utilization was higher, driven by the Omnipod 5 ramp benefit mentioned. Drug Delivery revenue declined 4% and at the high end of our guidance range. Gross margin was 55.3%, representing an approximate 1,300 basis point decrease, including a favorable foreign currency impact of approximately 70 basis points. Cost of revenue included a $37 million charge or approximately 1,100 basis points related to the voluntary medical device correction. The aggregate $37 million charge in Q3 primarily reflects the estimated replacement units, shipping, and reclaim costs of the PDMs for global Omnipod DASH users. This charge is within the estimated $35 million to $45 million we included in our October 8-K filing. We no longer expect any material additional operating expenses to be recorded in Q4 of this year or in 2023, as we previously had estimated. Excluding the Q3 medical device correction charge, adjusted gross margin was 66.1%, representing a 240 basis point decrease. The primary drivers were the expected higher mix of costs as we ramp our U.S. manufacturing operations, higher manufacturing costs associated with Drug Delivery, and a higher mix of costs given Omnipod 5 ramping. These costs were partially offset by growing volume in the U.S. pharmacy channel, including the associated premium. Operating expenses were slightly higher than our expectations to support higher demand for Omnipod 5 and were higher than Q3 of last year due to continued investments in sales and marketing, such as our Omnipod 5 launch efforts, development work to advance our innovation pipeline, and costs to scale our business to support our growth. Adjusted operating margin and adjusted EBITDA in Q3, which exclude the voluntary medical device correction, were 11.6% and 18.4%, respectively. Both metrics were impacted year-over-year by gross margin pressures and an increase in operating expenses. Turning to cash and liquidity. We ended the quarter with over $720 million in cash and the full $70 million available under our credit facility. Our financial position remains strong and offers us the flexibility to strategically invest in our business, further strengthen our innovation pipeline, and deliver growth for years to come. Now turning to 2022 guidance. We are raising our total company full-year revenue growth to a range of 18% to 19%, including total Omnipod growth of 23% to 24%. For U.S. Omnipod, we are increasing our revenue range to 30% to 31%. We expect revenue growth to be driven primarily by strong Omnipod 5 new customer starts and conversions to Omnipod 5 from both Omnipod DASH and Classic Omnipod, as well as increasing Omnipod DASH volume and the benefits of our pay-as-you-go business model. For international Omnipod, we are raising the low end of our full-year guidance and now expect a range of 11% to 12%. On a reported basis, we estimate an unfavorable foreign exchange impact of approximately 1,200 basis points. Growth is mainly driven by ongoing Omnipod DASH adoption, partially offset by AID competitive headwinds. Lastly, for Drug Delivery, we are raising the low end of our full-year guidance range and now expect a decline of 37% to 35%. As a reminder, 2021 levels were elevated as a result of the pandemic. Turning to 2022 gross margin. Excluding the impact of the voluntary medical device correction, we continue to expect a gross margin range of 65% to 66%. On a year-over-year basis, we expect our gross margin to be impacted by higher costs associated with our U.S. manufacturing ramp, product line mix due to ramping Omnipod 5, and lower drug delivery revenue. These headwinds will be partially offset by the benefit of increasing volume in the U.S. pharmacy channel. As we previously stated, we expect many of these factors to impact our results for the next couple of years. And as a result, we expect 2023 gross margin to be similar to this year. Excluding certain legal and CEO transition costs, we continue to expect operating expenses to rise year-over-year due to the investments in our sales and marketing efforts, including the launch of Omnipod 5, as well as expanding our innovation pipeline and clinical efforts and scaling our support functions. We continue to expect adjusted operating margin to be in the high single digits. For 2023, given the expectation for gross margin and the continued investments to launch Omnipod 5 in the U.S. and international markets, as well as ongoing innovation, clinical, commercial, and support functions to scale the business, and costs associated with our implementing a new enterprise reporting system, we expect operating margins to be similar to 2022. Our commitment to margin expansion continues, and we expect to begin to leverage this bolus of investments in 2024 and beyond. Lastly, we now expect capital expenditures to be relatively level with the prior year versus our previous expectation of a slight increase. Turning to our fourth quarter 2022 revenue guidance. We expect total company growth of 11% to 14%, including total Omnipod growth of 23% to 26%. On a reported basis, we estimate an unfavorable foreign exchange impact of approximately 500 basis points. For U.S. Omnipod, we expect growth of 27% to 30%. For international Omnipod, we expect growth of 15% to 18%. On a reported basis, we estimate an unfavorable foreign exchange impact of approximately 1,600 basis points. Finally, we expect Q4 Drug Delivery revenue to be nominal as the majority of our orders for the year have already been fulfilled. In conclusion, we are delivering solid financial performance, achieving critical milestones, and further positioning Insulet for long-term sustainable growth. These are exciting times, given the full market release of Omnipod 5, the recent milestones we've achieved, and the progress we've made advancing our innovation pipeline. We're focused on continuing to execute at a high level and delivering on our mission. With that, please open the call for questions.

And I show our first question comes from Jeff Johnson from Baird.

Thank you, Jim. Congratulations on the quarter. There are many impressive numbers we could discuss, but I would like to address the charging issue you mentioned regarding Omnipod 5 and whether you've seen any early indications of concern. I believe you can address this from a technological standpoint, and it may not develop into a significant problem. However, considering the rise in your stock tomorrow and high expectations following the positive performance of Omnipod 5, should we be worried that new prescriptions might need to be paused due to this charging issue? Will there be a need to come back in a few months to provide an update on a resolution and resume the momentum of Omnipod 5? Please clarify the level of risk associated with this charging concern.

Sure. It’s still very early in the process. First and foremost, patient safety is our top priority. Regarding the complaints related to the charging of the Omnipod 5, we are observing a small number, around a couple of dozen. We are examining this closely but do not yet have enough data to fully understand the situation and related risk levels. We will conduct a thorough investigation, and if any action is necessary, we will act quickly. As mentioned in the prepared comments, we will ensure complete transparency with our customers, investors, and the FDA. It’s too early to provide definitive answers, but we are monitoring it very closely.

And I show our next question comes from the line of Travis Steed from Bank of America Securities.

Congratulations on a great quarter. I have several questions, but I'll focus on the increase in pump patients you mentioned, possibly in the thousands. Can you provide more insight on whether this is a one-time spike due to waiting for Omnipod 5, or if you expect this to be a more sustainable trend where the 60-40 ratio can be maintained? Additionally, how does this trend influence your outlook for 2023? It seems the market is anticipating around 20% growth, but I believe the U.S. could perform slightly better while international markets may fall short of that target.

Travis, I'll start on that, and then I'll ask the team to maybe add some color. I'll just say that Omnipod 5 is such an appealing offer. I think the general market has been waiting for Omnipod 5. It's revolutionary. You guys all know the value proposition, but a wearable, disposable, tubeless patch pump, we competed on that form factor for a long time very successfully. Now we've added automated insulin delivery. So patients no longer have to make the choice between a patch pump and an AID pump. Coupled with all of the access to the channel, the reimbursement access, and the economics, I don't think that value proposition is going to be any less appealing in Q4 or in 2023 than it is today. I'll ask the team if they want to add color.

Travis, it's Bret. As you know, we've discussed the 80-20 split for many years, where 80% of our new starts come from MDI. This focus will continue, but as Jim mentioned, patients no longer have to choose between the superior design of Omnipod and an automated insulin delivery system; they can have both. It’s not surprising to us that the split has changed from 80-20. We are still assessing where it settles. We are unsure if there is a group of pump users who wanted to try Omnipod, or if it will stabilize at a different ratio. However, we are thrilled to finally provide an option for those who preferred the Omnipod design while choosing an AID system. We will see how it evolves in the upcoming quarters, but it’s an exciting development as we witness these two pump conversions.

That's great. I want to address the question about revenue growth in 2023. As mentioned, AID is crucial and that's evident in the varying growth rates in different regions. In the U.S., we have significant momentum. As noted, there is increasing demand with MDI, along with conversions from our existing legacy products and competitive switches. There's a lot happening in the U.S. To give you some context for 2023, while we won’t provide specific guidance until our Q4 call in February, it's clear that the U.S. is exhibiting strong momentum. We expect larger dollar growth in 2023, but we need to account for some volume benefits from Q2 and Q3. This positions us to start in the low 20% growth range for the U.S. On the other hand, for OUS without AID, we foresee consistent growth. We anticipate strong performance with DASH in our current markets. We're also starting the rollout of Omnipod 5 in international markets midyear, which will continue through 2024. This suggests that for international, we can expect growth in the high single digits to low double digits range. We'll keep a close watch on both regions through Q4 and gain more confidence in these dynamic metrics.

And I show our next question comes from the line of Robbie Marcus from JPMorgan.

Yes. And congrats on a great quarter. And Wayde, thanks for the very nonspecific guide for next year. I think that will help get models in a good place. As we think about some of your competitors, they talked about lots of macro headwinds and upfront costs to the patient, and you clearly have a very different business model. But I was hoping you could just give us the latest on what you think the actual out-of-pocket is on average for patients for Omnipod in the U.S. versus MDI and basal? I don't know if it's a different price point yet and what you've disclosed there or willing to disclose. And the average monthly cost for a basal patient. Is it materially different outside the U.S. just as we think about some of the macro headwinds and headwinds some of your competitors are facing?

Robbie, I can take that one. This is Bret. So as far as the macro trends in the field, we're not feeling it. We're in the midst of an Omnipod 5 launch, demand is incredibly high. The team is excited, and patients are wanting to start out with Omnipod 5. I can't say that we're feeling any of the effects of lingering COVID or any sort of macro inflationary recession-type concerns. Our business model is different. We've spent years planning a scalable, affordable business model that would allow for patients to upgrade from existing Omnipod products and start. We've got very low co-pays that remained below $50 on average, with the vast majority of all co-pays in the pharmacy channel being less than $5. We've said that with DASH and really the Omnipod 5 co-pays almost mirror DASH exactly where we price Omnipod 5 at parity. That pricing is very similar for out-of-pocket costs for our users. As far as the basal-only pod, I don't know if that's the question you're asking about out-of-pocket and co-pays; we’re not there yet. We'll be building reimbursement and having discussions with payers now that we've mentioned this basal-only pod. But we do have some basal usage with our existing products; primarily, DASH is a type 2 access. It's very good for DASH, and they'll customize it and use it as a basal-only pump. And that reimbursement is the exact same for type 1s and type 2s for basal and for insulin intensive. So more to come on the commercialization plans of our basal-only pod, but we'll be building reimbursement next year with that product.

And I show our next question comes from the line of Margaret Kaczor from William Blair.

I wanted to follow up, I guess, in more detail even on that basal-specific pump. What are the features that we're going to look for there? Is this a mechanical pump? Is this a smart pump? Is it going to have the closed-loop features? Is this going to be maybe in the pivotal type 2 trial or not? Or is it going to be a separate trial together?

Margaret, it's Bret. We're excited to start sharing more about the basal-only pod. Jim mentioned at the beginning of the call some of what we're excited about. Although we've got access today and some basal-only users will use a product like DASH, it was not built for basal-only usage. There's a lot of complexity in pumps, and we want to take that complexity away for anybody who wants to start on a basal-only pod. It won't have a controller. That's very key because a lot of the complexity with pumps is around settings. There are no settings with a basal-only pod, so it's going to be designed for the basal-only user, whether that's in endocrinology or primary care, it's focused on simplicity. We'll start sharing more about what its form factor looks like. We'll be submitting this product to the FDA in the coming days. We’re just excited to start educating you on what it's all about, and we'll do that in the future.

Yes. In fact, I'll just tag on to Bret's comments. This is key for us in terms of growing the total addressable market. We obviously have the leading offer right now for patients with type 2 diabetes with Omnipod DASH, as Bret just referred to. But with the basal-only pod, we'll be getting much earlier and much further upstream into the journey of patients. Because it will be the same core Omnipod platform as a product, patients will get used to using our Omnipod product. As their insulin needs change, it creates the pathway for them onto our other offerings. This is a great experience for patients. We're going to dramatically simplify the use of basal insulin for those type 2 patients. These customers as they progress in their therapy will have a natural pathway to our other offerings.

And I show our next question comes from the line of Larry Biegelsen from Wells Fargo.

I'll echo my congratulations on a really strong quarter here. Wayde, I wanted to focus on the U.S., the $60 million, I think, in one-time items in Q3, do you expect more? I’m trying to reconcile, if I back that out, we get to about 33% growth in Q3, ex one-time items, why are you guiding to 27% to 30% for Q4, a little bit slower? How do we put that into the context of the 2023 color you gave, if I heard you correctly, low 20% range for U.S. Omnipod growth next year, given the Q4 guidance that you've given?

Yes, Larry. Starting with the additional volume from Omnipod 5, as we mentioned earlier, some of this is due to timing since we only had Omnipod 5 fully released in the market for two months during the quarter. A significant number of users received their starter kits and first refill orders in that timeframe, contributing to the extra volume. Additionally, there will be retail pharmacy stocking occurring gradually. These factors drove the extra volume in the quarter. Regarding your question about whether this trend will persist in Q4, we will monitor it closely. We have various scenarios on how this could unfold. What we anticipate in our guidance, which could influence whether we reach the high or low end, depends on how many of these users wait a month for their next prescription, place orders mid-month, or immediately reorder. We're eager to see how Q4 plays out. The main point for 2023 is the law of large numbers. We are planning for continued dollar growth of the business next year, estimating that this will settle in the low 20% range, which is a solid starting point. Again, we are not providing guidance at this moment; we simply want to share some insights. Our official guidance will be released in February, allowing us more time to evaluate these dynamics.

And I show our next question comes from the line of Caitlyn Cronin from Canaccord Genuity.

This is actually Kyle on here. The one question I wanted to talk about was specifically moving into more of a type 2 focus. I mean, obviously, you have a business now. We've seen some of your other diabetes technology partners when they've gone more meaningfully into the basal market, they made some commercial changes or a commercial shift in focus, adding salespeople, things of that sort. Just Bret, I wondered how we should think about the state of the sales force now with respect to the type 2 market and maybe the investments you'll need to make over the course of the next 12 to 24 months when you bring the basal-only offering and then eventually an AID for type 2.

Kyle, thanks for the question. We've got a really strong type 2 offering today, as you know, with access that mirrors type 1 in the pharmacy channel. Starting there, we’ve got a great product with DASH. It's got an indication for all insulin-requiring patients, and great coverage. We're going to add to that offering by getting an indication for Omnipod 5 as we've started that clinical trail. We're excited about capturing patients at the moment they need insulin. It's too early to say what the commercial model will look like for that product. But we know we can capture some of it today with just the existing sales force and team that we have, as many of those patients do reside in endocrinology, and we do call on a small number of primary care physicians with our existing sales teams. More to come there.

And I show our next question comes from the line of Jayson Bedford from Raymond James.

Just two questions that require quick answers. On the '23 guidance, just kidding, Wayde. I know it's not guidance, but just what's the expected FX impact on revenue? And then second, on the basal-only pod, you mentioned submitting in the next few days, but I think your commercialization is not until '24. So one, I just want to know, is it a 510(k)? And second, why the big gap between selling and commercialization?

Eric, you bet. Happy to talk about the '23 color that we're providing to help everyone here before we get the guidance. Jayson, that's on a constant currency basis. Obviously, not going to factor in where we think FX is going at this point. So just think about the color there on a constant currency basis. So on Basel, yes, it is a 510(k). We're submitting it imminently. We don't want to get out in front of timelines on approvals. We'll let you know as we get approvals and what we're going to do. I think the reason for that is it's a new-to-world offer. It's not a new pod. It’s an Omnipod platform built on our core offering. But the patient set is new, the channel might be new. The call points might include new call points. There's just a lot to consider in the commercial offering that we need to work through. We're not going to jump the gun on talking about these things until we have more certainty.

And I show our next question comes from the line of Steve Lichtman from Oppenheimer.

Just a couple of quick follow-ups. One, can you give any more color on timing of iOS? And two, relative to basal-only, I apologize if you mentioned this, but do you anticipate that being a lower COGS device given maybe a different price point as you go into that channel?

So we'll start with IOS, the iOS work is proceeding, as we said last quarter. We're really confident in what we're building there. Our teams have tested it. We've had it out of testing on sample customers. We’ll give you more updates as we get closer. That's another one I don't want to jump the gun on, and it’s our practice to not talk about those dates until they're right in our hands. We're very confident that our iOS offering is going to be very strong, and we want to get it to market as quickly as we can. On the basal pod, I'll just say that we’re not ready to talk about pricing. I will say about the basal pod that because it's based on our core Omnipod platform, it has all the same IP wrapped into it, all the same IP protection. What's different about it is that it's basal-only. It doesn't take a controller. It has a basal rate built into it. It makes it really simple for anyone who has a needle phobia. Look, I'm needle phobic, right? That's what we're going for here. It’s disruptiveness; it’s a huge benefit to their care.

And I show our last question comes from the line of Chris Pasquale from Nephron Research.

A couple more questions about the basal pod. It sounds like a very exciting opportunity. First, what percentage of basal patients have reimbursement coverage for Omnipod today? Are you going to be able to piggyback on that, or do you have to start from scratch with the new product? Then secondly, there's obviously a lot of focus on CGM adoption in this population. Is there any potential benefit to having the Pod and the CGM sensor talk to each other in this population, as these patients need to titrate insulin rates as their disease progresses or anything like that?

Yes. Chris, great question. The reimbursement today for basal-only patients, the answer is there really is no difference between insulin-intensive type 2 patients and basal patients as far as reimbursement goes. However, Omnipod was not built with basal-only in mind. While there are some patients using it for basal-only, it just wasn't really built that way. So it's not ideal for basal-only; it does seem complex to a primary care physician that simply wants to write a prescription. The reimbursement is there; we plan on changing it because it will be a different code. It will have a different reimbursement rate at a different price. We just haven't, we’re just not ready to talk about that. As far as the CGM goes, that's a lift for us because, as you know, CGMs provide the user with tremendous information that requires them to act. It shows physicians' time in range. That's going to be really valuable for driving demand for the basal-only pod, but our initial thinking is we really don't want those two products to speak to each other because that does add complexity. The thought on the basal-only pod is to keep it as simple as possible, to ease the prescription process.

And I show our last question comes from the line of Matthew O'Brien from Piper Sandler.

I show our last question. I wanted to ask about the competitive space. You mentioned a few catalysts there, and obviously, the CE Mark, but some evidence development that's going on there as well to expand coverage. I was just hoping you could kind of frame how you expect those kind of things to help your international growth next year and going forward?

So on international, there are several things going on. We're very pleased to get the CE Mark. So that's no longer a hurdle we have to get over. We have CE Mark, and that's good to go for Omnipod 5 as we've said before. What we're working on now in terms of the Omnipod 5 launch is ensuring that we have the right cloud infrastructure that delivers the right experience for customers. So we want to ensure we're delivering the full Omnipod 5 experience in the markets where we launch. We also obviously have to comply with European and local market data privacy and security regulations. That's the work we’re building. We don't need the RCT that we talked about to do that. We expect to launch in Europe in the mid-'23 and then stage it through the second half of '23 into '24 to ensure each market has a strong launch plan. The randomized controlled trial is designed to make sure that we have the right kind of clinical evidence to position Omnipod 5 appropriately in ex-U.S. markets. We are confident that we’ll be able to demonstrate the benefit of our AID algorithm and the pod form factor against non-AID pumps and CGM alone.

And I show our last question comes from the line of Matt Taylor from Jefferies.

Congratulations on a very strong quarter. I have a couple of questions regarding tubeless options. Could you elaborate on your expectations for the percentage of people with diabetes in the U.S. who have historically chosen your tubeless pump? Do you think this is changing, and if so, why? Additionally, could you provide insights on whether the demographics of your patients are evolving in terms of age or whether they are new patients or returning ones?

Thank you for the question. We have always been at the forefront of increasing penetration from multiple daily injections, which remains our primary focus. A new start refers to the first time someone begins using an Omnipod product, and we do not count renewals. Historically, our focus has been on multiple daily injections, with 80% of our new starts originating from this group. However, this quarter we experienced a shift, with only 60% from multiple daily injections due to a surge in users transitioning from two pump systems, a trend we hope will continue. We have also led in the pediatrics segment, and the Omnipod 5's design is very appealing to both parents and children. We lost some ground without an automated insulin delivery system, as it forced parents to choose between a product ideal for children and an automated system. Now, that choice is no longer necessary. This past quarter, we observed a significant increase in pediatrics as a share of our new starts, which is encouraging. These newly diagnosed patients are the ones we want to retain on the Omnipod for life. Additionally, we have seen attrition remain quite stable, and we are enthusiastic about how the Omnipod 5 will enhance retention among our current users.

Thank you. I'm showing no further questions in the queue. This concludes our Q&A session. At this time, I would like to turn the conference back over to Jim Hollingshead, President and Chief Executive Officer, for closing remarks.

Thanks, Dalam, and thanks, everyone, for joining us today. These are incredibly exciting times at Insulet as Omnipod 5 is out in the market transforming diabetes management for thousands of people, and that number keeps growing. We could not be more excited to further expand our addressable market with our new innovation in Type 2 for the type 2 community with our basal-only pod. We've got an incredible team, and with significant momentum, we're going to continue to execute on our mission. Thank you, and have a great evening.

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.