Insulet Corp Q4 FY2022 Earnings Call

Good afternoon, ladies and gentlemen, and welcome to the Insulet Corporation Fourth Quarter and Full Year 2022 Earnings Call. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Deborah Gordon, Vice President, Investor Relations.

Thank you. Good afternoon, and thank you for joining us for Insulet's Fourth Quarter and Full Year 2022 Earnings Call. With me today are Jim Hollingshead, President and Chief Executive Officer; and Wayde McMillan, Executive Vice President and Chief Financial Officer. Bret Christensen, our Executive Vice President and Chief Commercial Officer, is also with us for the Q&A portion of our call. Both the replay of this call and the press release discussing our 2022 fourth quarter and full year results and 2023 guidance will be available on the Investor Relations section of our website. Before we begin, we would like to inform you that certain statements made by Insulet during the course of this call may be forward-looking and could materially differ from current expectations. Please refer to the cautionary statements in our SEC filings for a detailed explanation of the inherent limitations of such statements. We'll also discuss non-GAAP financial measures with respect to our performance, namely adjusted gross margin, 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 rates, 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. In the fourth quarter, the global Insulet team achieved another record growth quarter, capping off a remarkable 2022. We surpassed our expectations once again, recording a revenue growth of 45% in the U.S. and over 35% for total Omnipod. Our new customer acquisitions in both the U.S. and globally reached record highs. This marks our seventh consecutive year of revenue growth exceeding 20%. Throughout 2022, we delivered consistently strong financial results and reached several critical milestones. Currently, we have approximately 360,000 active global customers on the Omnipod platform, including over 100,000 using Omnipod 5. In fact, Omnipod 5 accounted for more than 90% of our new customer acquisitions in the U.S. in Q4. This innovative technology is the leading option in the market and stands out to consumers. The full market release of our Omnipod 5 automated insulin delivery system in 2022 was a significant milestone. This product reflects the core mission of our company, and we have continued to build on that momentum, securing CE Mark approval and quickly expanding our labeling in the U.S. to include pediatric customers as young as 2 years old for Omnipod 5, in addition to completing the 510(k) submission for our type 2 basal-only pod. In 2022, we also bolstered our intellectual property protections, an effort that will safeguard our innovation capabilities for years to come. Furthermore, we made significant progress in our clinical initiatives, including the recent release of our initial real-world data for Omnipod 5. I will elaborate on these achievements shortly. I could not be more proud of all that the Insulet team has accomplished in advancing our mission to enhance the lives of individuals with diabetes. Despite everything we achieved in 2022, I firmly believe our greatest accomplishments are still ahead. Omnipod 5 is truly unparalleled as an automated insulin delivery system. With Omnipod 5, we introduced several market-first features—it is the only tubeless, waterproof pod-based AID system and the first to offer full compatibility with smartphone control, featuring constant cloud-based connectivity. This advancement means doctors don’t have to wait for data uploads during patient visits. With Omnipod 5, customers can access their data without needing to plug in their devices. Our smart bolus calculator assists patients in managing their blood glucose levels and trends, and no other AID systems include the adaptive algorithm that Omnipod 5 employs. It functions right out of the box, learns each user's specific habits, predicts their trends, and automatically personalizes their care. These features provide substantial competitive advantages that enhance and simplify diabetes management. Omnipod 5 continues to attract customers across all market segments. Users switching from multiple daily injections are growing at the upper end of our projections, as are those transitioning from competing tube pumps. The number of current Omnipod user conversions also exceeds our expectations. In Q4, the anticipated split of customers coming from MDI and traditional tube pumps was approximately 65-35, a shift from our historical 80-20 mix due to a greater number of competitive switches. This further highlights the value Omnipod 5 offers to MDI users and traditional tube pump users. We are also successfully winning back thousands of customers who had previously used our products and decided to return to us in Q4 to adopt Omnipod 5. Our adopters span all age groups. Due to the unexpected demand for Omnipod 5, we have increased investments in our support capabilities, especially within our call centers. These enhancements have helped restore our customer and product support experience to historical levels of excellence. This included swift actions to address certain issues related to the Omnipod DASH and Omnipod 5 handheld devices. We previously announced a medical device correction for Omnipod 5 due to a problem with the controller's charging port and cable. The FDA has classified this as a Class 2 correction, and we are currently in the process of providing replacements to customers upon their request. Regarding the Omnipod DASH MDC update, we expect to complete the replacement of personal diabetes managers in the next few months. I am proud of our global team’s commitment to execute these corrective actions with urgency and care. Consumer-focused innovation is at the heart of everything we do. Omnipod 5 was designed entirely with the user in mind, and the feedback we receive confirms our collaborative success. One touching story was shared by a mother of an 8-year-old with diabetes, who said, "Omnipod 5 has given me my life back. I sleep through the night. I feel like me again. Diabetes has moved from the foreground to the background in our daily lives." This illustrates the power of Omnipod 5 and validates our design philosophy for the product and customer experience. A crucial factor in our continued growth for Omnipod is our steadfast commitment to expanding access and awareness through various initiatives. Firstly, we are enhancing our presence in the U.S. pharmacy channel. With reduced co-pays and extensive coverage, access to Omnipod 5 and Omnipod DASH becomes more affordable and straightforward, facilitating adoption and increasing attractiveness, especially during challenging economic times. Secondly, we have priced Omnipod 5 to be on par with Omnipod DASH, allowing us to broaden commercial coverage for Omnipod 5 significantly. By the year’s end, coverage reached nearly 90% of U.S. lives. Additionally, most of our U.S. customers pay less than $50 a month through pharmacies, making it comparable to the costs of multiple daily injections, despite our technology providing better outcomes, glycemic control, and quality of life. Our annuity business model and pharmacy access also yield benefits for physicians and payers. We have eliminated significant upfront costs and prolonged lock-in periods, which provides substantial value to payers compared to traditional tubed pumps sold through durable medical equipment channels. This is particularly relevant given that individuals in the U.S. often change insurance plans every couple of years. I want to highlight that we recently informed U.S. classic Omnipod users of our intention to phase out that technology by the end of this year, as most of our customer base has transitioned away from the legacy product. We value each classic Omnipod user and will assist them in transitioning to either Omnipod 5 or Omnipod DASH. 2022 was an exciting year for Insulet regarding the advancement of our clinical initiatives, with that momentum continuing into 2023. We recently finalized our pivotal study protocol for type 2 diabetes with the FDA and received IDE approval. We plan to begin enrollment for this three-month study in the coming weeks. It will be the largest clinical study we've conducted, enrolling up to 350 individuals with type 2 diabetes from 20 sites across the U.S., with a particular emphasis on recruiting diverse and underserved populations to validate the safety and efficacy of Omnipod 5. Omnipod 5 also paves the way for new clinical evidence. Just yesterday at ATTD, we presented our first real-world evidence for Omnipod 5, which incorporates data from over 31,000 users of the system for at least three months. This data is unrivaled by our competitors and provides key insights into product usage and health outcomes. We can identify which device settings optimize time in range while minimizing hypoglycemia. The results mirror those observed in our pivotal trials, reinforcing the advantages of our customizable target glucose settings. These factors contribute to Omnipod 5's potential to lead the market for years ahead. Our enthusiasm is shared by a healthcare provider who noted that the real-world data set for Omnipod 5 is impressive because it includes all users connected to the cloud-based system. With this extensive sample and minimal selection bias, we see strong time in target range and low instances of time below range, exceeding glycemic targets on average. This is highly promising for long-term real-world benefits. Over time, our real-world data for Omnipod 5 will be immensely valuable since all users are cloud-connected. For patients, this means we can continually personalize and enhance their overall experience. For physicians, it streamlines their workflows. Our intention is to eventually link usage data to claims data to further propel Omnipod 5 adoption and develop additional enhancements such as population health management for payers. No other company in diabetes therapy can derive evidence from data that represents all users on therapy, which provides us with unique insights into actual usage patterns at the population level, allowing us to consistently enhance our offerings and strengthen our product differentiation. While we are excited about the market response to Omnipod 5, succeeding in the global diabetes arena demands a commitment to innovation. Currently, we have a robust pipeline that includes our type 2 basal-only pod, future AID offerings, and digital capabilities. Our distinct form factor and access model are enabling us to make strides in the type 2 market alongside type 1. We deliver an exceptional user experience, with individuals with type 2 comprising an estimated 15% to 20% of our new U.S. customers in Q4. We anticipate building on our competitive position in this market while also expanding our total addressable market with the planned launch of our new basal-only pod in 2024. This will be a groundbreaking product for the type 2 market and will provide an early introduction to the treatment experience, helping patients acclimate to the Omnipod on-body experience. We project that the total addressable market for our basal-only pod is roughly 3 million individuals in the U.S., effectively doubling our U.S. market size. We are also making significant progress in our development of integrating Omnipod 5 with DexCom's G7 and Abbott's Libre systems, and our iOS integration efforts are advancing smoothly. We provide the best AID system available today, and our future technology generations, including CGM compatibility, will further enhance our premier value proposition. To maintain our leading-edge technologies, protecting our intellectual property is a key priority. We have significantly expanded our patent portfolio in recent years. This past year, we more than doubled it through robust patent filings and an acquisition. We acquired the pump and AID patent portfolio of Bigfoot Biomedical, encompassing about 400 patents and numerous global patent applications. Over the years, Bigfoot has built a valuable patent library covering areas like closed-loop technology, smartphone control, secure communications, and enhancements to user experience. This acquisition notably strengthens our intellectual property foundation. Additionally, in the fourth quarter, we established a mutual agreement with Medtronic to refrain from asserting our patents over certain diabetes technologies. With some exceptions, this agreement applies to both companies' existing products and upcoming products commercialized for the next seven years, preventing direct copying of each other's products. This new agreement replaces an earlier one and offers greater certainty surrounding the covered products and duration. As a result of these efforts, we have created a substantial intellectual property moat that positions us well for future innovation and growth. Looking at our international operations, we experienced solid double-digit revenue growth last year, despite ongoing competition in the AID space. We expect to begin countering these challenges in 2023 with the midyear launch of Omnipod 5 in the U.K. and its introduction in Germany later this year, marking the start of our phased international rollout. We aim to expand the global launch of Omnipod 5 in 2024. Lastly, our global manufacturing capabilities continue to underpin our long-term growth trajectory and serve as an additional competitive advantage. Despite challenging macro conditions, we are committed to meeting the needs of our growing global customer base and the strong demand for Omnipod 5. Our operations team has diligently worked to secure components and produce products in advance of our anticipated demand. We remain dedicated to ensuring a consistent supply and delivering the highest quality products to all our global customers. In conclusion, the fourth quarter was an excellent finish to a remarkable year marked by strong financial performance and operational accomplishments. We have numerous exciting opportunities ahead, and the entire Insulet team is committed to fulfilling our mission and enhancing our long-term growth prospects. I will now pass the call to Wayde.

Thanks, Jim. 2022 was an exciting year with the U.S. launch of Omnipod 5 and the fourth quarter was no exception. We once again delivered strong financial results while advancing our mission. In Q4, we generated 23% revenue growth, finishing above the high end of our guidance range, driven by total Omnipod growth of 36%. On a reported basis, for total revenue, foreign currency was a 250 basis point headwind compared to Q4 of last year. U.S. Omnipod revenue growth was 45%, exceeding our guidance range. Revenue growth continues to be driven by our annuity-based model with cumulative record new customer starts and growing U.S. pharmacy volume. This includes an increasing contribution from Omnipod 5 and a premium for the Omnipod 5 and Omnipod DASH pods. Growth in the quarter included an estimated $15 million net volume benefit associated with the Omnipod 5 volume ramp. This was driven primarily by new Omnipod 5 customers including conversions from Omnipod DASH and Classic Omnipod, where we again benefited from some customers simultaneously getting both their starter kits and first order of refills as well as some initial stocking in retail pharmacies. This benefit was partially offset by some Omnipod 5 customers skipping a refill as a result of this dynamic. This volume benefit primarily from conversions will create a tougher comparison in future years as we expect most existing customers to switch to Omnipod 5 in 2023. During Q4, Omnipod 5 and Omnipod DASH new customer starts combined were 100% of our total U.S. new customer starts. This is an important milestone in our transition to pharmacy as all Omnipod 5 coverage is through the pharmacy channel, and this is also the majority of Omnipod DASH. As a result, our pharmacy channel volume increased to approximately 80% of our total U.S. volume in the fourth quarter. International Omnipod revenue increased 19% in Q4, above our guidance range driven by Omnipod DASH adoption. On a reported basis, foreign currency was a 13-point headwind over the prior year, which was approximately 3 points favorable versus our guide. As a reminder, our revenue in Q4 of the prior year was impacted by an unfavorable $5 million channel inventory reduction creating an easier comparison. During Q4, our estimated global attrition and utilization trends remain consistent with prior years with higher utilization in Q4. Note, we estimated higher utilization in Q3 above historic trends with the volume benefit of the initial Omnipod 5 ramp. Historically, our U.S. utilization has been highest in the fourth quarter of the year. Drug Delivery revenue declined 90% and slightly better than our guidance range. Gross margin was 58.8%, representing an approximate 10-point decrease, including a favorable foreign currency impact of approximately 50 basis points. Cost of revenue included a $21 million net charge or approximately 570 basis points associated with the voluntary medical device correction. This net charge was comprised of $27 million related to our previously announced Omnipod 5 MDC, partially offset by a $6 million benefit due to a revised estimated costs associated with the Omnipod DASH MDC. Excluding the Q4 MDC net charge, adjusted gross margin was 64.5%, representing a 480 basis point decrease in line with our expectations. Our growing volume in the U.S. pharmacy channel including the associated premium positively contributed to gross margin. This was more than offset by expected higher mix of costs due to the ramping of Omnipod 5 and our U.S. manufacturing operations as well as unfavorable mix from lower drug delivery revenue and a charge associated with the phaseout of classic Omnipod. Operating expenses were above our expectations to support continued higher sales performance and were higher than Q4 of last year as we further invest in our business. Adjusted operating margin and adjusted EBITDA and in Q4 were 11.5% and 19.3%, respectively. Both exclude the voluntary medical device correction net charge and a $2 million benefit related to a legal settlement adjustment. Both metrics were impacted year-over-year by gross margin pressures and an increase in operating expenses. Turning to full year results. We delivered total Omnipod revenue growth of 27% and total company revenue growth of 22%, which reflects the incredible demand for Omnipod 5 ongoing contribution from Omnipod DASH throughout our global markets and the benefit of our annuity-based business model. On a reported basis, foreign currency was unfavorable over the prior year by 360 basis points. In 2022, we achieved adjusted gross margin of 66.2%, down 220 basis points, and in line with our expectations. Adjusted operating margin was 9.5%, down 200 basis points, and adjusted EBITDA margin was 17.2%, down 240 basis points. Both metrics were impacted year-over-year by gross margin pressures and an increase in operating expenses and were slightly higher than our expectations due to our revenue outperformance. Turning to cash and liquidity. We ended the year with $675 million in cash. In addition, during Q4, we further strengthened our financial position by increasing our available borrowings under our credit agreement to $100 million. We remain in a solid position to continue investing in our business. Now turning to our 2023 outlook. For the full year, we expect total Omnipod revenue growth of 17% to 22% and total company revenue growth of 14% to 19%. For U.S. Omnipod, we expect revenue growth of 21% to 26%, driven by strong Omnipod 5 adoption coming from both new customer starts, and conversions from another Omnipod product as well as the continued adoption of Omnipod DASH and the benefits of our pay-as-you-go business model. We currently expect the cadence of our revenue growth to be more weighted to the first half of the year, given a tougher comparison in the second half of the year, resulting from the Omnipod 5 full market release in the U.S. in August of 2022. This includes the related volume benefit from the accelerated pace of customer conversions in the second half of 2022. For international Omnipod, we expect revenue growth of 6% to 10%. On a reported basis, we estimate a favorable foreign currency exchange impact of approximately 100 basis points. Growth is mainly driven by ongoing Omnipod DASH adoption, partially offset by AID competitive headwinds. We're excited to introduce Omnipod 5 to our first international markets later this year; however, due to our annuity model, we are not expecting a material contribution to growth in our international markets for Omnipod 5 in 2023. Lastly, for drug delivery in 2023, we expect a decline of 55% to 45%, representing a $1 decline similar to what we experienced in 2022. Turning to 2023 gross margin, we expect a gross margin range of 65% to 66%, consistent with 2022 at the high end. We expect a favorable impact from the benefit of increasing volume in the U.S. pharmacy channel and favorable geographical sales mix. These tailwinds are expected to be more than offset by inflation, higher costs associated with our U.S. manufacturing ramp, and product line mix due to increasing Omnipod 5 volume. As we previously stated, we expect many of these factors to impact our results into 2024. We expect gross margin in the first half of the year to be near the lower end of the range and the second half of the year to be closer to the high end of the range. This improvement will be driven by increasing sales volume, improving manufacturing performance, and timing of the additional costs associated with the Omnipod DASH and Omnipod 5 medical device corrections. We expect operating expenses to rise due to investments in our sales and marketing efforts, including the phased launch of Omnipod 5 in our international markets, as well as expanding our innovation pipeline, clinical efforts, and scaling our support functions. We expect operating margin to be in the high single digits, similar to 2022 levels, with significant improvement in the second half of the year over the first half due to the timing of investments and improved second half gross margins. We remain committed to margin expansion, and we expect to begin to leverage this bolus of investments in 2024 and beyond. For capital expenditures, we expect a lower level than 2022 as we begin to leverage our investments, building capacity to date. Turning to our first quarter 2023 revenue guidance. We expect total Omnipod growth of 22% to 25% and total company growth of 11% to 14%. On a reported basis, we estimate an unfavorable foreign exchange impact of approximately 200 basis points. For U.S. Omnipod, we expect growth of 33% to 36%. We expect the core drivers of growth to be the ongoing adoption of Omnipod 5, including the benefits of the U.S. pharmacy channel and our consistent record new customer starts as well as our annuity model. For international Omnipod, we expect growth of 4% to 7%, driven by ongoing Omnipod DASH adoption, partially offset by AID competitive headwinds and estimated order timing. On a reported basis, we estimate an unfavorable foreign exchange impact of approximately 600 basis points. Finally, we expect Q1 drug delivery revenue to be nominal based on the current production schedule. In conclusion, we delivered a strong finish in the fourth quarter and another year of solid financial performance. We achieved many milestones and entered 2023 with a clear strategic focus and momentum in our business. We're incredibly excited about the year ahead and what is to come for our customers and our shareholders as we further execute our global mission.

Our first question comes from Robbie Marcus from JP Morgan.

Great. Well, first off, congrats on a really nice quarter, impressive work. Maybe for my question, I'll ask on new patient growth. By my math, it looks like you're somewhere in the low 30% year-over-year with a much better second half versus first half. It's great to see that competitive switches are becoming part of the equation. All age groups, 100% in pharmacy. You're basically taking off all the right boxes. I guess the question is, how sustainable do you think this trend is? Do you think it's a bit of early adopters or new converters? Or do you think this is the start of a longer-duration, multiyear trend where Insulet can start to shift towards market leader in terms of new patients and overall market share?

I'll start, Robbie. Thanks for your congratulations. We are very optimistic about Omnipod 5. We have seen strong initial performance. As Wayde mentioned in his prepared comments and as we discussed last quarter, we are facing some challenges with starter kits, which makes it difficult to identify a clear trend. However, we believe demand is robust and we remain very positive. Omnipod 5 is positioned to be a game changer, providing an excellent experience for customers and delivering outstanding results. We expect demand to persist not only through 2023 but for the long term as well. I'll let Bret or Wayde share their thoughts.

Sure, Jim. I can jump in. Robbie, as Jim mentioned, we are seeing a really strong start in the first five months of reporting for Omnipod 5 on this new platform, and we believe this growth is sustainable. We also have a significant innovation pipeline ahead. We will be introducing iOS integration with G7 and Libre, and we just finalized the Type 2 trial with the FDA, so we’ll be seeking an indication for Type 2 for Omnipod 5 as well. We plan to introduce many more innovations over time, which strengthens our confidence in the platform's continued growth. However, as Jim pointed out in our prepared remarks, a major contributor to our current growth rate is the transition of customers from the DME to the pharmacy channel. This transition, as mentioned in our prepared remarks, will create challenging comparisons for us next year. The new converters, alongside our current customers transitioning from classic Omnipod and DASH to Omnipod 5, are expected to mostly complete this change by the end of 2023. That aspect will not be as sustainable since they will not convert again. Nonetheless, the overall business is performing exceptionally well, with record new customer starts coming from MDI and competitive switches. We believe we are at the beginning of a prolonged multi-year growth cycle.

Robbie, I want to add to what you mentioned about new starts. MDI is likely the strongest indicator of this. As Jim noted, we have achieved record MDI, record competitive conversions, and record new starts overall. We believe that the MDI growth is very sustainable. It's important to note that we were still refining our processes in Q4. There were challenges with the onboarding process; access was not fully optimized but did reach 90%, which aligned with our new starts for the quarter. We are also beginning to promote Omnipod 5 more actively, and you'll see some direct-to-consumer initiatives rolling out. From my perspective, I am confident that MDI growth can be maintained throughout the year.

Our next question comes from Jeff Johnson from Baird.

Congratulations on the quarter. Just wanted to ask a question, I guess, on the international launch of Omnipod 5. Obviously, we've now got a couple of markets that we know is coming into here in the second half of this year. Jim, maybe you can just level set us again. I know there's some stricter restrictions on the warranty periods in some of these markets. You're going to have to pursue reimbursement in some of these markets. There's cloud-based data regulations, you're waiting their way through. But I'm going to tell you, I mean over here at ATTD, it was helpful yesterday, the interest in 05 to the point that I was a little worried for Dr. Li with some of the feedback from some of the doctors just on how much they were battling to get her to commit to launching 05 sooner in a lot of these countries in that. I mean there is true interest as you guys, I'm sure, well know. So how fast can new patients start MDI win competitive converts, those kind of things ramp in the international markets relative to what we've seen so strong here out of the gate in the U.S.

Thank you, Jeff. We recognize the significant pent-up demand for Omnipod 5 and the considerable interest surrounding it. We recently spoke with Dr. Li and learned about the challenges she faced during her sessions. Our goal is to introduce Omnipod 5 into as many markets as possible, as quickly as we can. This is not only a fantastic growth opportunity for us, but it also greatly benefits our customers. The feedback we’ve received from users in the U.S. indicates that it is transforming lives, providing an excellent and user-friendly experience. Therefore, our priority is to expedite our market entry as much as possible. We have announced plans to launch in the U.K. mid-year and in Germany by the end of the year. There are several reasons for this timeline, particularly because both are significant markets. We are currently working diligently behind the scenes to enable faster execution in these areas, as we aim to reach more patients. While it serves our interests to expand quickly, our primary focus is helping those patients access our products. Regarding your question, each market has its own set of regulations concerning pump adoption and switching protocols. Generally, it might be more challenging for existing users of tube pumps to transition to Omnipod 5 compared to the U.S., where we benefit from pharmacy reimbursement channels. This makes it easier for patients to switch and try our product. This smooth transition has significantly driven our growth in the U.S. In many European markets, however, the process may be more complicated, even though these markets remain largely untapped. The typical patient in these regions is still using multiple daily injections, meaning there are many self-injecting individuals eagerly awaiting our innovation. We are enthusiastic about moving quickly to serve their needs. Once we enter the market, as Wayde mentioned, we need to provide cautious guidance on revenue expectations. Our model involves patients converting to Omnipod 5, which is followed by a gradual revenue increase as they begin using our products. Therefore, we need to be careful in how we project revenue impacts, but we believe there are many important and under-penetrated markets where we are accelerating our efforts to meet demand.

Our next question comes from Jayson Bedford from Raymond James.

Congrats. Maybe just a simple question here, just looking at the volume and the revenue growth. Volume through the pharmacy, is there a ceiling to that number? Where can that go?

Jayson, I'll take that one. This is Bret. There could be, but it's not in the same way that you might see with other companies because remember, we do have a Part D indication from CMS, which means all of our Medicare business goes through the pharmacy channel. Medicaid business goes through the pharmacy channel. All Omnipod 5 business goes to the pharmacy channel. So really, there's not a ceiling, except for the fact that we do still have DME contracts with our legacy product, which of course, we announced we will phase out at the end of the year and then a little bit with DASH. But outside of that, if you just look past those products with Omnipod 5 and beyond, there really is not a ceiling to the volume that we can get in the pharmacy channel as all of Omnipod 5 will go through the pharmacy channel and all Medicare, Medicaid. So we're going to be much higher than I think most companies in diabetes. I don't know if we'll ever get to 100%, but I don't see a ceiling that prevents us from getting there.

Our next question comes from Larry Biegelsen from Wells Fargo.

Congratulations on a really strong quarter. I wanted to ask about the basal-only pod. You have submitted the 510(k) application. When do you anticipate receiving approval, around mid-2023? Is that a realistic timeframe? How quickly do you plan to commercialize it? Do you expect a similar launch market share as we saw with Omnipod 5? What kind of contribution do you anticipate for this year and next? Lastly, I'm sorry for all the questions, but who do you believe is the ideal patient for this product?

Thank you, Larry. I'll begin with the latter part of your question and ask Bret to address the earlier parts. We believe the ideal customer is someone with type 2 diabetes who is either currently using daily injections or has not yet begun. This could be due to needle phobia, inconvenience, or because they are already on daily injections but struggle to maintain consistency. The basal-only option targets individuals in the early stages of insulin treatment for type 2 diabetes, a demographic that typically has numerous health management challenges. We see significant potential in this group, as we can greatly simplify their experience, ensuring they receive their daily insulin in a convenient and user-friendly manner without needle discomfort. Our research supports this potential, and we anticipate a strong demand in that segment. Importantly, these customers will adapt to the Omnipod platform and get accustomed to the on-body experience. Most individuals with type 2 diabetes requiring insulin will evolve in their dosage requirements, moving from once-daily basal to more intensive needs like a basal-bolus regimen, which is facilitated by Omnipod 5. Hence, we're advancing with a solution that truly simplifies their experience while preparing them for a transition as their needs evolve toward Omnipod 5.

Yes, absolutely. Regarding the timing and clearance, we won't provide specific details aside from confirming that it is with the FDA, and we are pleased about that. We cannot speculate on the approval timeline, but we mentioned that commercialization will likely begin in 2024. We plan to launch in a limited capacity, similar to our approach with Omnipod 5, as we believe this is the best practice. There is much for us to learn, including scaling manufacturing and refining the commercial model. We also need to establish access for this product, so we are currently having productive discussions with payers. You can expect a limited launch, starting primarily within the endocrinology field and some high-risk primary care physicians. We will then determine how to reach the broader population that includes more primary care and family practice doctors, as well as some endocrinologists. We are excited about this product as it meets a significant need, and we are currently refining our commercial strategy and launch plans.

Our next question comes from Matt Taylor from Jefferies.

Congrats on a good result. So I wanted to ask you kind of a conceptual question investors have access to this and I'm curious to hear your answer. Just with all of the new diabetes drugs and the loss drugs. I think in the most extreme form of this argument, people would say, 'Oh, you're going to cure diabetes and potentially have an impact on your market and demand for pumps. So I guess, what would you say to investors who have that question about whether the whole classes of new drugs can actually impact the market? Does it curb your opportunity at all? Or do you think that it's just sort of a side show?

Thank you, Matt. I'm excited to discuss this. First, we're really pleased to see innovation in the diabetes sector. It's our motivation every day to assist those with diabetes and ensure they receive the care they deserve. Our goal is to simplify their lives and enhance their outcomes. The increase in innovation from various companies, whether they are in pharmaceuticals, devices, or data, is something we are very happy to witness, as it aligns with our mission. In terms of the new drugs, it's still early to assess their impact. Although there has been considerable discussion and results presented in the market, it's too soon to determine their effect on disease progression. These drugs primarily target individuals with type 2 diabetes, and their influence on the progression of the disease remains uncertain. Many clinical studies show that participants were often insulin users, which adds an interesting perspective. Nonetheless, it's important to remember that there are half a billion people globally with diabetes, most of whom have type 2 diabetes, and as the Western diet spreads, so does type 2 diabetes. This presents a significant unmet medical need worldwide. I believe this will not materially affect our business, as there are countless individuals we can assist. The market is vastly underpenetrated. While we are thrilled to see advancements that help people, our focus remains on innovating our platform, and we are confident there are ample opportunities for growth as we continue to support those in need.

The value proposition of our basal-only pod is not to compete with GLP-1s and other effective drugs like Epiduo; rather, we believe it complements those treatments. Many patients in clinical studies were already using insulin, and we often hear from physicians that patients do not start insulin therapy soon enough. The aim of the basal-only pod is to alleviate needle phobia, enhance adherence, and complement the existing medications that are aiding individuals with type 2 diabetes. We see a definite opportunity for this product. However, we will gain further insights during our limited release and as we introduce the product to the market.

Our next question comes from Travis Steve from Bank of America. I wanted to ask about the recent movements in your patents. Is this primarily focused on protecting your current portfolio, or are you also looking to build a pipeline? Do you anticipate the environment becoming more litigious in the next couple of years? Additionally, I wanted to discuss your approach to leverageable investments and your thoughts on margin beyond 2023, specifically if you expect to achieve the typical couple of hundred basis points of margin expansion.

Thanks, Travis, and thanks for your congrats. I'll start with the IP stuff and then I'll ask Wayde to comment on the margin side. It's a little bit of both. We're really bullish on our IP, and we've been working all year actually for months before that, but we've had a concerted effort this year to make sure that we are not just showing up our IP position but growing our IP position. And we've done that, as I said in the prepared comments, we've done that through a number of avenues, including organically, we filed a record number of patents this year. Then we made some settlements; we made the settlement with Medtronic to shore up our position and pay some certainty. Then the acquisition of patents. And as you know, with IP, it's both ends, right? The more IP you have, the better position you are in terms of playing defense, but also the better position you are in terms of commercializing, sort of ideating, creating new offerings and commercializing them. So we think it's put us in a great position on both of those. And specific to Bigfoot Biomedical, they had a very rich set of intellectual property patents and filed patents, granite patents and filed patents that we find really interesting from an innovation point of view. But it's both ends in terms of offense and defense.

Jim, I want to address the margin aspect of your question. As you mentioned, we remain committed to expanding our margins. However, we have had to pause this for a couple of years largely due to the macroeconomic pressures affecting many businesses. From an investment perspective, we chose not to cut back on our investments in commercial expansion and research and development. Instead, we decided to continue investing through this inflationary period. Although we are facing higher costs for components that are impacting our gross margins and encountering some business model challenges, such as with Omnipod 5 at a slightly elevated cost, and our U.S. manufacturing facility taking longer to reach a beneficial point while still being a high-cost facility, we opted to invest heavily in our leadership position because of the significant market opportunity. We have a strong position to build upon and want to ensure we are optimally positioned. We acknowledged in our prepared remarks our ongoing commitment. We believe that the investments we are making now and through 2023 will enable us to begin improving our gross margins and operating margins starting in 2024. While we have not provided specific numbers or guidance yet, we are confident that our current investments, both domestically and internationally, will set us up well for this leverage in 2024.

Our next question comes from Josh Jennings from Cowen.

Thanks very much. I wanted to ask about the type 2 opportunity in the U.S. and the current business. Are you seeing DASH conversions to 05 within the 15% to 20% of new patient starts? Is 05 making up a significant portion of that? How are you approaching the guidance for Omnipod 5 and Type 2 before we have clinical data and an FDA on-label decision?

I'll take the first part of that question, and I can let Wayde comment on guidance. The 15% to 20% we referenced is a percentage of all new starts, which refers to new customers who have never used Omnipod before. These new starts are coming from either multiple daily injections or a competing pump, and this figure reflects the percentage of all new starts that were type 2 for us. Historically, this has been as high as 40%. Currently, it’s a lower percentage, primarily because the volumes for Omnipod 5 have increased significantly. Over the last six months, we’ve focused extensively on speaking with physicians about Omnipod 5, educating their staff, explaining its algorithm, and helping patients get onboard. As a result, most of our field time has been dedicated to the launch of this new product. However, the actual number of type 2 patients new to Omnipod isn’t vastly different; it’s simply that the percentages have decreased. We believe the offering is excellent and are eager for this year, as physicians become more comfortable with Omnipod 5 and begin prescribing it. At that point, we can start to promote our entire portfolio in the field and discuss the type 2 offering with DASH and the value Omnipod 5 provides. This remains a fantastic opportunity for us that is significantly underpenetrated, and we are very excited about it.

Our next question comes from Margaret Kaczor from William Blair.

I wanted to maybe talk a little bit about the volume benefits that you guys have had, and part of it is the retail pharmacy part is just the upgrade from older generation Omnipod. So if we take those 2 individually, you've got 80,000 retail pharmacies in the U.S. should all of them have 05 as of what you've seen to date, which ones do? And I guess, how is throughput there? And then similarly, in terms of the volume benefits of upgrades, where are we right now within that process if you guys could us kind of even a rough percentage and whether or not that should impact the '23 numbers at all or guidance?

Sure. Margaret, I can start with the conversion insights and the volume and then Bret, probably best positioned to talk about the expansion because those are 2 of the major drivers, which, as you know, Margaret, we called out in the prepared remarks. Just to confirm for everyone, we call conversions, our existing pod users, whether classic Omnipod or DASH, who convert over to Omnipod 5, which is a little different than the 2 pump market, which calls them upgrades. And to be clear, we do not call conversions or upgrades, new customers. Those are not factored into our new customer totals because for us, it's an annuity model. So as people move from older products to new generations, we don't call them new shipments or upgrades or whatever others in the market call them. For us, it's just customers converting to the latest technology. And where we're at in that is making great progress. In fact, as Jim had in his prepared remarks, overwhelmingly success here with a lot of our existing customers wanting to move onto Omnipod 5 and frankly, putting some of the stress on the system in the first couple of months. So significant conversions. We think, Margaret, that we'll be through most of them by the end of 2023. But just as a reminder, until we get a type 2 indication for Omnipod 5 and maybe even after, DASH is still the product for type 2 customers. And so we'll still have quite a few DASH customers on type 2 and those won't be converting over to Omnipod 5. So those are the major drivers of the volume benefit. Obviously, the single largest driver for us is new customer starts, and we've had record new customer starts quarters for some time in the U.S. So that's the major driver of the volume benefit. And then also, as you mentioned, retail pharmacies, that is also a smaller component of the $5 million ramp benefit we called out here in the quarter as we start to stock retail pharmacies. Bret, do you want to pick up with that one?

Yes, Margaret. We've discussed the approximately 85,000 retail pharmacies in the U.S. While we don't disclose the exact number of those pharmacies distributing Omnipod, we do receive substantial information from IQVIA. However, I think the key point is less about that figure and more about how many pharmacies have access to 75 and can dispense Omnipod 5. Almost all of them can because we have effectively built out the channel. Our product is with all the major wholesalers, who supply Omnipod 5 to pharmacies. Regarding the 85,000 retail pharmacies, the actual inventory of Omnipod on the shelves isn't significant. When a physician sends a prescription to a pharmacy, wholesalers typically deliver Omnipod to that retail location within about 24 hours. In some instances, pharmacies do stock Omnipod if they know they have regular customers picking it up each month. Overall, our channel is very robust, and most of those pharmacies are equipped to distribute Omnipod.

Our next question comes from Chris Pasquale from Nephron.

I would like to know more about when you expect to have G7 integration. Should we anticipate it in the second quarter? Additionally, the absence of an iOS app has been somewhat overlooked considering the challenges faced during the 05 launch, but I know you've been working on it for some time. Can we expect that in the next quarter or later in 2023? Any clarification would be appreciated.

Chris, for your question. I’ll start. We’re working really closely with our partners, both Dexcom and Abbott on CGM integration and working really hard on – as you know, we don’t give advanced notice of timelines that we expect or anything like that. I’ll just say that we’re working really hard, and we see them both as extremely important – and we’re very bullish on completing integrations across the ICGM space as those CGMs become available. On iOS, that work continues to go really well. Same answer. We’re not – we’re not reporting on timelines. But that app is, I think, progressing really, really nicely. And as we have more news, we’ll give it to you.

Our next question comes from Kyle Rose from Canaccord Genuity. This is Caitlin on behalf of Kyle. What's the full impact of pricing in 2023, including the upgrades of everyone to DASH and '05? And can you break that out from a volume mix perspective?

Caitlin, it's Wayde. We don't provide that metric, but as you mentioned, we do gain from the premium in the pharmacy channel, primarily due to conversions from the DME channel and new customers coming through pharmacy. I want to remind everyone that one factor affecting our gross margin is offering the PDM at no charge. With the significant increase in new customers, the costs associated with the Omnipod 5 product are impacting our gross margins. However, pricing plays a minor role in our revenue growth; the main drivers are volume, including the initial ramp-up of Omnipod 5 and the benefits we’re seeing from the two-script advantage in the early quarters. While we don’t break out that metric, it has been beneficial for us and should continue to be advantageous in the pharmacy channel.

And we have time for one more question. It will come from Matthew O'Brien from Piper Sandler.

Great. Thanks for including me here. I have a question for Wayde. When I examine the U.S. market, the figures over the past couple of years stand out to me. I know there's an adjustment for the stocking in '22, which I believe was approximately $80 million. From '21 to '22, you increased by about $150 million. When you account for that $80 million, it looks like you're moving from around $800 million to about $1.1 billion in '23. This indicates an increase of nearly $300 million year-over-year after making those adjustments. I want to understand what this suggests about new patient additions on the MDI side, especially with the significant growth during Q2 and potentially Q1 as well. Additionally, what does this mean for market growth and competitive share conversion? It seems like there's an implied acceleration there. Also, from an infrastructure standpoint, do you have everything ready, including manufacturing and customer service, to support this near doubling of U.S. Omnipod revenue over a couple of years?

I didn't leave much unsaid there, Matt. That's a broad question with many angles to consider. Honestly, I didn't quite grasp the stocking calculations you mentioned, and we don't track anything in the same realm of magnitude that you referred to. Let me address what I believe your question is about, which is our ongoing business growth, especially in the U.S. We don’t have any large normalization items as you suggested. Occasionally, we do highlight increases or decreases in the channel. To clarify for 2022, we had nothing in the first quarter. In the second quarter, we reported a $7 million channel increase as we began the rollout of Omnipod 5. In the third and fourth quarters, we noted an additional script benefit of $16 million in Q3 and $15 million in Q4. When you adjust for those, we’re looking at an approximate 4% impact in the U.S. It’s not as significant as you mentioned, but it's something we want to monitor because most of that volume benefit stems from converting customers. Just to clarify this dynamic we keep discussing: as we launch Omnipod 5, new customers receive a starter kit, which includes their diabetes manager and initial pod order. If they also receive their first pharmacy script order, for example, in September, they would obtain their starter kit and first order then. We’re interested in how this will affect our second quarter of Omnipod 5. We noticed that a good portion of customers skipped an order and used their existing pods. We also saw a benefit from customers obtaining two scripts in Q4, which netted around $15 million. If you normalize for that, we’re again discussing a 4% impact, which is why it’s significant to mention. Regarding your question about market share, yes, we are definitely taking share. There's no doubt we are growing at significantly faster rates in the U.S. compared to overall market growth. As Bret and Jim indicated earlier, we achieved a record number of competitive switches. Historically, about 20% of our customers came from competitive switches and 80% from multiple daily injections. As shown in the metrics we provided, that split is now 65-35, representing record competitive switches and new customers entering pump therapy. We believe we will continue to gain share for some time. We discussed several factors on today’s call that we think are driving our business and maintaining our leadership position. I’ll stop here, Matt. I look forward to discussing any further aspects of your question after the call.

And we have a question from Steve Lichtman from Oppenheimer & Company.

Congrats, everyone. You mentioned on DTC that you'll be putting the foot down here near term. Can you talk a little bit about what your plans are there? What form will it take? When are you planning on kicking that off? And do you see that as a particular opportunity once you get a type 2 label for Omnipod 5?

Yes, it's Bret. Thanks for the question. We are beginning to utilize direct-to-consumer marketing for Omnipod 5, which you will start to see on TV. We've always been strong in social media and digital advertising, and now we will add TV this quarter, if you haven't noticed yet. You'll start to see some of that, and we will evaluate how it performs. Regarding the type 2 opportunity, we recognize there's potential to raise awareness, especially with the Basel pod launch. In the past, we focused on Medicare free trials with the DASH product for type 2. However, you won't see anything related to a pod until we receive the necessary label; nothing will happen with the Basel pod until then. This quarter, the primary focus will be on direct-to-consumer marketing for Omnipod 5.

This will conclude today's Q&A section. I would like to turn the conference back to Jim Hollingshead for closing remarks.

Jim, sorry about that. This is Deb. Just before you close, I just want to let everybody know that call to your attention that there was an error in the earnings release; it was in the appendix in the adjusted earnings per share reconciliation. One of the EPS adjustments should have been a reduction to EPS, not an addition. And therefore, I just want to let everybody know that non-GAAP adjusted EPS for the fourth quarter was $0.49 instead of the $0.55 that's shown, and we'll be issuing an update shortly. Just note also, there is no change to adjusted EPS for the full year; it's correct as shown. Sorry, Jim, go ahead.

Thanks, Deb. That's a real-time catch everybody. So I hope everybody stayed on the call long enough to get that update. So thanks, Deb. And thanks, Julian, for shepherding the call. And more importantly, thank you, everybody, for joining us today. These are remarkable and really exciting times at Insulet, and we are just getting started fulfilling our mission to improve the lives of people with diabetes around the world. Omnipod 5 is clearly transforming the diabetes landscape, and we continue to deliver strong financial performance and strengthen our global competitive position. So thank you all, and have a great evening.

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