Earnings Call Transcript - PODD Q3 2024

Operator, Operator

Good afternoon, ladies and gentlemen, and welcome to the Insulet Corporation Third Quarter 2024 Earnings Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session, and instructions will follow at that time. 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.

Deborah Gordon, Vice President, Investor Relations

Thank you. Good afternoon, and thank you for joining us for Insulet's third quarter 2024 earnings call. With me today are Jim Hollingshead, President and Chief Executive Officer; Ana Maria Chadwick, Chief Financial Officer and Treasurer. Both the replay of this call and the press release discussing our third quarter results and 2024 guidance will be available on the Investor Relations section of our website. Also on our website is our supplemental earnings presentation. We encourage you to reference that document for a summary of key metrics and business updates. Before we begin, we remind 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 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 from period to period, and we believe they are helpful for others as well. 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.

Jim Hollingshead, President and Chief Executive Officer

Thank you, Deb. Good afternoon, and thank you for joining us. We delivered another strong quarter of financial results and achieved several outstanding milestones throughout our business. I am proud of what our team accomplishes every day to create better health outcomes for our customers, set new standards in the management of diabetes and drive success across our organization. The robust momentum we saw in the first half of this year has carried into the back half, putting us on track to close out another impressive year and generate over $2 billion in full-year revenue for the first time in Insulet's history. Near the end of August, we received FDA clearance for type 2 label expansion for Omnipod 5, which is a testament to the strength of our submission and powerful clinical data. We are excited about our opportunity in the type 2 diabetes market and building upon our strong established foundation for long-term growth. In the third quarter, our global new customer starts grew sequentially and over prior year. This included sequential growth in the U.S. in both the type 1 and type 2 populations. Internationally, our strong momentum also continued with stable sequential new customer starts, proof of the robust demand we are seeing for Omnipod 5, considering the typical seasonality that occurs during the slower summer months in our international markets. Omnipod 5 is winning in every market in which it is offered, and Omnipod is now the #1 insulin pump for new pump users in Europe. We remain confident in our expectation of sequential and year-over-year new customer starts growth for both the U.S. and International in the fourth quarter. We have a clear strategy focused on expanding the Omnipod 5 platform, driving growth in the U.S. in both type 1 and the type 2 and accelerating international growth and expansion. Our recent milestones are key indicators of the progress we continue to make and the momentum across our organization to achieve our strategic goals. And this momentum is reflected in our strong financial results. In Q3, we achieved our highest quarter of total revenue dollars, driven by total Omnipod revenue growth of 26%, including U.S. growth of 23% and International growth of 35%. And we continue to expand margins as we scale, execute, and drive efficiencies across our global business. Ana will take you through the financial details for the quarter and provide an update on guidance. I will focus my remarks on three key areas: first, our type 2 label expansion, the market opportunity and our commercialization plans; second, our cascade of innovation and how it supports our strategy to drive growth in both the U.S. and internationally; and third, our customer base and market leadership. Let me start with our recent type 2 label expansion, which makes Omnipod 5 the first and only AID system indicated for both type 1 and type 2 diabetes. Omnipod 5 continues to be the game-changing offer we thought it would be. And now we are bringing all the benefits to individuals with type 2 diabetes that we already deliver to those with type 1, namely: unmatched form factor, ease of use, affordability, pay-as-you-go economics and widespread access through the pharmacy channel. All of this, together with CGM integration and compatibility with Android- and iOS-based smartphones and, most importantly, all while delivering great clinical outcomes and quality of life. Omnipod 5's type 2 label expansion further strengthens our growth trajectory. In fact, type 2 users represented over 25% of our U.S. new customer starts in the third quarter as we drove ramping adoption during September. In the U.S., our type 2 indication significantly expands the total addressable market for Insulet by making Omnipod 5 commercially available to approximately 6 million people who live with insulin-requiring type 2 diabetes. This market includes 2.5 million people who are insulin intensive and on multiple daily injections. We estimate that market is less than 5% penetrated, with the majority of current users using Omnipod. The other portion of the market includes over 3 million people that use insulin as a basal-only therapy every day. In order to continue expanding our reach to type 2 patients, we are well underway on an initiative to expand our sales force and commercial relationships to align with the immense opportunity at hand. We have begun the process of growing our team in anticipation of type 2 clearance earlier this year, and we continue to expand today. This strategy is consistent with our established U.S. commercial playbook, adding feet on the street to build on our existing relationships with endocrinology practices while also broadening our reach into high-prescribing PCP practices. With this expansion, we expect to reach over 40% of the 2.5 million type 2 insulin-intensive population during 2025. And we will also be able to go deeper into PCP practices, where we are already receiving great inbound interest. Additionally, we continue to complement our direct selling model with DTC. We expect our type 2 label expansion will make our DTC efforts and awareness initiatives even more efficient. Historically, over 50% of our DTC leads are from individuals with type 2 diabetes, and now we can get those customers quickly onto Omnipod 5. We are making all of these investments thoughtfully. And as our Q3 results demonstrate, we are committed to driving further margin expansion. Let me now discuss our cascade of innovation and how we continue to strengthen our market-leading position as we expand our Omnipod 5 platform. Last quarter, we announced the full market release of Omnipod 5 with Dexcom's G7 in the U.S., starting with specialty pharmacies, and communicated that we would ramp G7-compatible pods broadly through retail pharmacy channels over the following months. This approach has proven to be very effective, and G7 customer starts have consistently met our targets. I'm happy to announce that G7 pods are now fully available in retail pharmacies, in addition to customers also having the choice of specialty pharmacy, making it even easier to start on Omnipod 5. Adding to this cascade of innovation in the U.S., we are on track to launch Omnipod 5 integrated with Abbott's FreeStyle Libre 2 Plus sensor by the end of the year. We are excited to provide customers with expanding options as we have experienced great success in providing patients with the choice of sensors in the U.K. and the Netherlands with both Abbott and Dexcom CGM offerings. At the start of last week, we fully launched the Omnipod 5 iOS app in the U.S., in line with our planned timing. Within hours of our app launch, we became the top downloaded medical app in the iOS App Store. Integrated with G6, our app offers enhanced capabilities that are unique and huge timesavers for users, such as a custom foods feature that makes mealtime simpler. Early feedback has been extremely positive. We heard from one of our customers who told us, 'Being able to do daily activities and need to carry only my personal smartphone is the smallest piece of normalcy and the biggest relief. I'm sitting here crying just overwhelmed with how much that means. I haven't felt this normal in years, and it means so much.' The iOS app is just one more advancement that allows our customers to enjoy simplicity, freedom, and healthier lives through our innovative technology. And as previously communicated, we remain on track to launch the Omnipod 5 iOS app with G7 in the U.S. and are planning to bring this integration to market in the first half of 2025. Internationally, we are making great progress with our recent launches of Omnipod 5 in France and the Netherlands. Although early, Omnipod 5 is starting to build a growing number of new users in both markets. We are on track to launch Omnipod 5 in additional countries starting in early 2025. We are also excited to expand our international offerings with additional sensor options, further launching Omnipod 5 integrated with FreeStyle Libre 2 Plus and introducing the integration of G7 in the first half of 2025. Turning now to our customer base and market leadership. We continue to set the standard and be an industry leader with Omnipod 5. By the end of the third quarter, approximately 90% of our U.S. customers were already using Omnipod 5, as were approximately 25% of our international customers. This is a testament to the power of Omnipod 5. It wins everywhere it goes. Our strategy remains focused on bringing people out of multiple daily injections onto Omnipod therapy. MDI users are our target market and present a large opportunity as we continue to rapidly increase our customer base and drive overall market expansion. Our growth in the third quarter was driven by increasing new customer starts from MDI. As a result, over 85% of our U.S. new customer starts came from people previously on MDI. We remain the clear market leader due to the highly differentiated nature of Omnipod. We have two decades of experience and investments that have led to our growing economies of scale. We have distinct and sustainable competitive advantages, including world-class manufacturing, which allows us to produce tens of millions of high-quality safety-critical pods. Adding to our scale, during the quarter, we celebrated the grand opening of our state-of-the-art Malaysian manufacturing facility, which provides further flexibility and strengthens our capabilities. Additionally, widespread access through the U.S. pharmacy channel is an important value proposition for our customers. This was a multiyear journey requiring significant investments to build the specific expertise and deep infrastructure we have today. We are proud that our time and investments have paid off, with nearly 100% of our pods now sold through the pharmacy channel, with the number of healthcare providers writing scripts for Omnipod 5 growing to over 22,000. We are excited about where we sit today and the significant growth catalyst that we expect to drive further long-term value creation. With that, I will turn the call over to Ana to walk you through our results and guidance.

Ana Maria Chadwick, Chief Financial Officer

Thank you, Jim, and good afternoon, everyone. Our global team continues to execute on our mission, and we delivered another quarter of strong financial results. Third quarter results exceeded our expectations. We achieved 25% revenue growth, driven by total Omnipod growth of 26%. Our estimated global retention remained stable, and utilization was slightly higher than the prior year. As Jim mentioned, we grew both global and U.S. new customer starts sequentially. Foreign currency had a favorable impact on total company reported revenue of 30 basis points versus our guide. U.S. Omnipod growth was 23%, finishing near the high end of our guidance range, driven by ongoing strong demand for Omnipod 5. Our U.S. revenue growth continues to be primarily driven by increased volume resulting from our success expanding our customer base. And the Omnipod 5 integration with G7 is quickly gaining momentum. We are excited about the opportunity that our Omnipod 5 type 2 label expansion brings to drive further growth in our business. We are seeing an uptick in type 2 new customer starts following the FDA clearance, which, given the nature of our annuity model, we expect to contribute meaningfully to revenue starting in 2025. Lastly, U.S. utilization trends were consistent with the prior year. Turning to International, where our team delivered another impressive quarter and once again sizably exceeded our expectations. In Q3, we drove growth in all of our international markets. We achieved International Omnipod revenue growth of 35%, primarily fueled by continued strong demand for Omnipod 5. Last year's launches in the U.K. and Germany are driving growth in revenue and new customer starts. And while still early days, we are seeing increased demand for Omnipod 5 in France and the Netherlands as well as for our recent integrations with Libre 2 Plus. While volume is the largest contributor to revenue growth, International revenue also benefited from higher pricing as new and existing customers adopt Omnipod 5. International utilization trends remained slightly elevated versus the prior year due to higher initial Omnipod 5 orders, similar to what we saw following the U.S. Omnipod 5 launch. We remain well positioned for further growth with more Omnipod 5 launches starting in early 2025. On a reported basis, foreign currency was favorable 130 basis points over the prior year and 230 basis points versus our guide. Drug Delivery revenue was $10 million, which was above our guidance range due to an increase in orders from our partner. Gross margin was 69.3%, up 150 basis points, primarily driven by pricing benefits in both the U.S. pharmacy channel and our international markets as well as ongoing improved manufacturing efficiencies. We continue to drive margin expansion as we scale and execute on our initiatives to drive operational excellence across our business. Operating margin of 16.2% and adjusted EBITDA of 23.2% both exceeded our expectations, driven by our strong revenue and gross margin performances as well as the operational leverage we are realizing throughout our business. From a tax perspective, last quarter, we discussed the release of a portion of our valuation allowance. In the third quarter, we released an additional $12 million, resulting in a noncash tax benefit in the period, which has been adjusted out for non-GAAP purposes. We anticipate releasing the remaining balance of $15 million in the fourth quarter. We continue to expect our 2024 non-GAAP effective tax rate to be in the range of 20% to 25% and for this to be the rate in 2025 as well. Turning to cash and liquidity. We ended the quarter with approximately $900 million in cash and the full $300 million available under our credit facility. Our commitment to drive margin expansion, profitable growth, and positive free cash flow is paying off, resulting in our ability to invest in our business and strengthen our overall financial profile. Now turning to our outlook, starting with our fourth quarter revenue. We expect total Omnipod revenue growth of 13% to 16% and total company growth of 12% to 15%. For U.S. Omnipod, we expect growth of 9% to 12%. As a reminder, in the fourth quarter of 2023, we benefited from two stocking dynamics, totaling an estimated $30 million to $40 million. On a normalized basis, underlying growth in the fourth quarter of 2024 is expected to be approximately 21% in the midpoint of the guidance range. For International Omnipod, we expect growth of 30% to 33%. On a reported basis, we now assume a favorable foreign currency impact of 100 basis points. Finally, we expect fourth quarter Drug Delivery revenue to be approximately $7 million to $8 million. As a result of our fourth quarter revenue expectations, we now expect the following for the full-year: we are once again raising our expectations for total Omnipod revenue growth to a range of 21% to 22% and total company revenue growth to a range of 20% to 21%, putting us over $2 billion of total revenue for the year. For U.S. Omnipod, we are raising the low end of our revenue guidance range and now expect growth of 19% to 21%. For International Omnipod, we are raising our revenue growth expectations to a range of 25% to 27%. On a reported basis, we now assume a 100 basis point tailwind from foreign currency. Our outlook for our International business is strengthened by the success we are achieving with Omnipod 5, which has resulted in significant revenue outperformance and are raising International Omnipod full-year outlook by 1,700 basis points since the start of 2024. Lastly, for Drug Delivery, our outlook has improved, and we now expect a smaller decline in the range of 5% to 10%. Turning to 2024 gross and operating margins. Given our strong performance to date and confidence in our outlook, we now expect gross margin to be approximately 69%. We also remain committed to driving further operating margin expansion as we continue to gain efficiencies across our organization and improve our operating leverage, even as we continue to heavily invest for the long-term profitable growth. As a result, we are once again raising operating margin guidance another 50 basis points to approximately 14.5%. In closing, Insulet continues to be the market leader. Our expanding profitability and free cash flow drive our ability to continue to invest in our many growth catalysts. Our cascade of innovation and market expansion strengthen our long runway for sustainable profitable growth. With that, operator, please open the line for questions.

Operator, Operator

Thank you. Our first question comes from Travis Steed from Bank of America. Please go ahead. Your line is open.

Robert Marcus, Analyst

Great. Thanks for taking the questions. Congrats on a really nice third quarter. My one question. This quarter, Europe really stood out. Sizable beat, you said it was #1, new patient winner, and pricing helped. So I just wanted to help clarify a few things. Is that #1 in just the countries you're selling in? Or is that #1 overall in Europe? Which would be really impressive. How do we think about the magnitude of new patient growth? And if you want to throw U.S. in there as well, happy to hear that. And how do we think about the benefit of price and how sustainable is that? And how much more is to go in Europe? Thanks a lot.

Jim Hollingshead, President and Chief Executive Officer

Thanks, Robbie, and I appreciate the question and your congratulations. We are currently the top player in the markets we serve in Europe. We find this noteworthy because we have not yet launched Omnipod 5 in every market we operate in. In the countries where we are present internationally, Omnipod 5 is the leading pump. We have experienced a very strong quarter as a result. Growth has been significant, particularly in the U.K. and Germany, while the Netherlands and France are just beginning to gain traction, and we anticipate that this will continue. We are quite satisfied with the growth in new customer starts across Europe. You mentioned a second question regarding the U.S.; I will turn to Ana, but perhaps someone can remind me what the second part of the question was.

Ana Maria Chadwick, Chief Financial Officer

Yes. I'll discuss pricing in international markets. In countries where we have been offering Omnipod 5 for a longer period, such as the U.K. and Germany, we are nearing an anniversary. To recap, in these regions, we've engaged with health ministries, which have acknowledged the value of our product and have granted us a premium. As we enter new markets, France is at the early stages of rollout and we plan to expand into ten more markets as we proceed into 2025. We expect some countries to go through their annual review processes without experiencing significant year-over-year price increases, while new markets will begin to ramp up. Therefore, we foresee price growth in international markets as we approach 2025. Did you have another part to your question?

Robert Marcus, Analyst

It was just on the magnitude of new patient growth.

Jim Hollingshead, President and Chief Executive Officer

Yes. So new patient growth in Europe was stable in the quarter, which was terrific, because we would normally see some cyclicality, some seasonality in the summer months in Europe. So stable, really strong new customer starts with France in particular just beginning to ramp. So we were pleased with that. And then in the U.S., we had really good new customer starts, clear and strong sequential growth in the U.S. in both type 1 and type 2, leading the way with MDI.

Operator, Operator

Our next question comes from Jeff Johnson from Baird. Please go ahead. Your line is open.

Jeffrey Johnson, Analyst

Thank you. Good afternoon. Look, I don't want to steal Larry's 2025 guidance question. So let me start with a higher-level question, if I could. Jim, over the past year or two, in the U.S., I think we've been adding probably four to five points of T1 penetration each year and maybe 0.5 point or a bit more T2. When I look at your business or maybe even more broadly, across the industry, when I think about manufacturers, payers, and HCPs, is the bandwidth there that a T2 annual penetration moves to two or three points in a year or 2? Does four to five points of T1, two to three of T2, does that equal six, seven points of penetration each year for the market? Or is that going to be something less because one plus one isn't two because there's, I don't know, prior auth headwinds, there's capacity constraints on the manufacturing front, and doctors only have so much care time? Can the industry really handle kind of this potential uptick in T2 and keep the T1 penetration going at the same pace it's been going here in the last year or two? Thanks.

Jim Hollingshead, President and Chief Executive Officer

Thanks, Jeff. That's a great question. It's a little bit of a complicated question. So let me just answer it from our point of view and what we're doing. We continue to lead and extend type 1. We continue to drive MDI growth in type 1, where there's very clear leaders. So we intend to continue to be the leader and extend our lead in the type 1 market, which, of course, drives penetration because we're the player that's clearly leading in MDI and growing the market. On the type 2 side, we see that as an additive opportunity. The penetration in type 2 is very low for AID in type 2, and we saw a nice lift in September. So we feel really good about our position there as the first and only player with an indication for use in AID in the type 2 space. In terms of the penetration number, we can certainly grow both, and we will grow both. The type 2 will take some market development, but we're already seeing a lift. And we think, over the next handful of years, penetration can grow in type 2 2x or 3x over that span, maybe beyond. It's early days. And so we'll be leading and developing that market, and we'll continue to lead and develop both type 1 and type 2.

Operator, Operator

Our next question comes from Travis Steed from Bank of America. Please go ahead. Your line is open.

Travis Steed, Analyst

Hey, thanks for getting me back on. Not to steal Larry's thunder, but I know you're not going to guide on 2025 on this call, but I would like a higher level, like to think about kind of the opportunity you've got with new patient starts in 2025 with type 2. Just kind of all the puts and takes on '25 that you're thinking at this point. And one of your competitors talking about competitive dynamics, would love to hear how you're thinking about the competitive landscape as you move into '25 as well. Thank you.

Ana Maria Chadwick, Chief Financial Officer

I'll start with the guidance, and Jim may add some insights on the competitive dynamics. We're really excited about our growth prospects as we approach the end of the fourth quarter. As mentioned, we're planning to return to the industry standard of providing guidance by February, which will give us the opportunity to present a comprehensive overview. To provide some context on revenue, which drives our entire profit and loss, you've likely noticed the wave of innovations that launched in the U.S. during the second half of the year. This has led to an increase in new customer starts. Since we're operating on an annuity model, most of the revenue growth will materialize as we enter 2025. For international markets, we're moving through anniversary cycles for markets that launched earlier and will begin ramping up in new ones. I've also mentioned the pricing dynamics in the international markets, where we expect more robust growth in the U.S. We anticipate that most of our growth will stem from the increase in base customer starts as we expand our NCS. Overall, we feel well-positioned and will share more details as we move into February.

Jim Hollingshead, President and Chief Executive Officer

Thank you, Ana. I'll add some insights on the competitive landscape, Travis. We have one competitor that frequently discusses market dynamics. Here's what we understand: our retention rates are industry-leading, remaining high and stable. In regard to that vocal competitor, over the past two quarters, we have observed an increase in conversions from them to Omnipod 5. It's important to note that Omnipod 5 is highly differentiated, and since its launch, we have consistently seen competitive conversions to our platform because patients appreciate its ease of use and the many advantages it offers. Our main focus is on driving growth by transitioning individuals using multiple daily injections to Omnipod 5 therapy, where we are clearly the leader in the MDI market. Since launching Omnipod 5 in August 2022, we have added more patients moving from MDI to automated insulin delivery therapy than all our competitors combined, and this trend continues strongly today.

Operator, Operator

Our next question comes from Michael Polark from Wolfe Research. Please go ahead. Your line is open.

Michael Polark, Analyst

Good afternoon. Thank you. I have a question on type 2, the commercial preparation there, maybe it's a two-parter. One, on the field force investment, can you quantify kind of cumulatively, when you get through this cycle, how much you're expanding the rep base by? That's part 1. Part 2 then is on the doctors side. I heard, in the U.S., 22,000 HCPs are prescribing Omnipod 5. I'm curious for like type 2, do you have a sense for how many of those folks have ever written a DASH script? Kind of just interested what the share of wallet opportunity might be for type 2 versus just getting those HCPs to write type 2 for the first time. Thank you so much.

Jim Hollingshead, President and Chief Executive Officer

Thanks, Mike. Those are excellent questions. I prefer not to specify exact numbers related to headcount or spending, as the expenditures are included in our guidance, particularly regarding margins. To address your inquiry, we are expanding our current commercial model to reach more accounts, and we have improved our targeting based on opportunities throughout 2024. Historically, our main focus has been on endocrinology practices, but we are now branching out to engage high-writing primary care practices as well. Currently, we estimate that we reach about 30% of type 2 users who are on insulin-intensive MDI therapy. By moving into these high-writing practices, we anticipate that we'll connect with over 40% of those type 2 MDI insulin-using patients. Additionally, our current call point includes some basal-only patients, and high-writing primary care providers tend to have a greater proportion of these patients, which will further enhance our reach. This illustrates the scale of our expansion, moving from about 30% of type 2 intensive users to around 40%. As a reminder, we've expanded our sales force, which is something we've consistently pursued. We've successfully scaled up in 2024 and plan to continue applying our robust commercial model in Q4 and into 2025.

Operator, Operator

Our next question comes from Danielle Antalffy from UBS. Please go ahead. Your line is open.

Danielle Antalffy, Analyst

Hey, good afternoon guys. Thanks so much for taking the question and congrats on a really strong quarter here. Just a quick question. As we think about the Q4 guidance and how you're thinking about the U.S. Omnipod line item, specifically, it does come in at the midpoint below consensus, but you just beat the consensus number. So I just want to make sure we're considering everything in what is usually a seasonally stronger quarter from a deductible perspective and make sure I'm not missing anything there. Thanks so much.

Ana Maria Chadwick, Chief Financial Officer

Thank you, Danielle, for your question. You are absolutely correct. At the midpoint, our U.S. Omnipod guidance is below the consensus, and I want to remind everyone that it represents a 21% growth on a normalized basis compared to the stocking activities from a year ago. However, at the high end of our guidance, we align with the consensus. This indicates that U.S. Omnipod is expected to grow more than 20% in each quarter of the 2024 calendar year. We see strong traction and drivers, and we are well positioned. Our guidance reflects our best available information at this time, which we're sharing with you. We are very excited and well positioned to stick to the midpoint of our full-year guidance range at the 20% mark for U.S. Omnipod.

Operator, Operator

Our next question comes from Patrick Wood from Morgan Stanley. Please go ahead. Your line is open.

Patrick Wood, Analyst

Perfect. Thank you so much. Yes, just one from me, and apologies if you already hit this. We're all just juggling a lot of calls today. But the type 2 side of things, obviously, label cleared. You said that there was an improvement as you moved through the quarter. I'm just curious, initial feedback from patients. I know you've had some experience in that market already. But any learnings that surprised you that would have formed your thinking about what the ramp of that curve could look like as you move into next year? Just as you get your feet on the ground, how are you feeling it? And has there been anything that surprised you versus previous expectations? Thanks.

Jim Hollingshead, President and Chief Executive Officer

Thanks, Patrick, and thank you for the question. I want to express how proud I am of our team for achieving the label clearance earlier than we anticipated. We expected it in Q4, but we secured it with a month to spare in Q3. This accomplishment reflects our team's dedication to getting everything ready for the launch. In September, we observed an increase in patients from the MDI side, particularly among those with type 2 diabetes, which was encouraging. From our experiences in September and during the Omnipod GO pilot, we've learned that there are many type 2 diabetes patients on insulin therapy, including those on GLP-1 medications who still struggle with glycemic control. The demand is significant, and the SECURE-T2D trial clearly demonstrated that these patients can benefit from our system. We've also discovered that some primary care practices, especially those that have not prescribed pumps before, are very interested in understanding automated insulin delivery technology. Their interest grows even more once they see Omnipod, as they often perceive pumps to be bulky and complicated with tubes and needles. After seeing Omnipod, they recognize its simplicity, which aligns with feedback we've received from our investigation sites involved in SECURE-T2D. They were pleasantly surprised by how straightforward Omnipod 5 is compared to their expectations. These insights make us optimistic about further developing this market and driving growth, especially considering the clinical need for better control among patients who are already on insulin or GLP-1 therapies, as well as the enthusiasm from doctors about the ease of use of Omnipod 5.

Operator, Operator

Our next question comes from Larry Biegelsen from Wells Fargo. Please go ahead. Your line is open.

Lawrence Biegelsen, Analyst

Good afternoon. Thanks for taking the question. And I guess, Jeff, is such a smart man. I do have a follow-up on the question Danielle asked earlier, but just a different angle here. So Jim, the Q4 underlying U.S. Omnipod growth, as you said, is about 21%, which does imply a deceleration from Q3 if we adjust for the stocking a year ago, I think, in Q3. So how should we think about the 21% underlying growth in the context of 2025? Does the type 2 launch help maintain or accelerate the U.S. Omnipod growth off of the Q4 underlying growth? Thank you.

Ana Maria Chadwick, Chief Financial Officer

Yes. I'll start with that one. So again, growth over 20%, we're excited by that. The thing to remember is a lot of these new customer starts sequentially and growth we're experiencing also out of our type 2. Given our annuity model, we're going to see more of that benefit as we progress through the quarters here into 2025. So that would be the main driver here for our confidence and our excitement as we move forward. I don't know if there's...

Jim Hollingshead, President and Chief Executive Officer

Yes, I'll just add that we are committed to being transparent with our best available estimates, and that is what we are sharing with you. We feel very confident in our guidance. Looking at the new customer start dynamic, we experienced clear sequential growth in new customer starts in the U.S. This growth would have been evident even without the increase in type 2. We saw clear sequential growth in new customer starts for both type 1 and type 2. As mentioned in our prepared remarks, we anticipate year-over-year growth in the U.S. for the second half of the year. The situation is very clear, and we're confident in our guidance. The growth in type 2 further strengthens our confidence in our guidance for Q4. However, as you are aware, our annuity model means that revenue will ramp up into 2025, resulting in a ramping effect.

Operator, Operator

Our next question comes from Margaret Kaczor Andrew from William Blair. Please go ahead. Your line is open.

Unidentified Analyst, Analyst

Hey guys. Thanks for taking the question. It's actually Jimmy on for Margaret tonight. I wanted to touch on operating margins. Really, really strong performance here this quarter. So maybe you can just talk to some of the points that are driving that leverage? And then as it relates to your confidence on sustaining that into next year?

Ana Maria Chadwick, Chief Financial Officer

Thank you, Jimmy, for that. We have delivered very strong margin growth, and we are confident that this will continue. As I mentioned before, we aim for at least 100 basis points of margin expansion annually. Some key factors contributing to this margin include the gross margin expansion we have experienced. Additionally, our scale has helped us gain some leverage in our operating expenses. As we grow, we expect our gross margin to continue to improve, though the growth rate may be more moderate moving forward. This is because we have significantly benefited in the U.S. from price increases as we transitioned from the DME to the pharmacy channel. Currently, about 100% of our volume is coming through the pharmacy channel, which will support this growth in the future. We also have other opportunities for efficiencies, including sourcing volumes from Malaysia and various factors in international markets where we anticipate price increases. In summary, we are seeing benefits from gross margin and leveraging our scale to manage our operating expenses effectively.

Operator, Operator

Our next question comes from Issie Kirby from Redburn Atlantic. Please go ahead. Your line is open.

Issie Kirby, Analyst

Hi, everyone. Thanks for taking my question. I just wanted to ask about the basal side of things. Obviously, you had a bit of a change in your strategy as flagged last quarter there. So just wanted to hear about what you're seeing from patients and providers on the basal side. Any sign that you're seeing patients who are on basal perhaps intensifying and moving onto Omnipod now that it's more available to them? And just on type 2 more broadly, I guess, any early learnings around retention and behavior for these patients?

Jim Hollingshead, President and Chief Executive Officer

Thank you, Issie, for those questions. Let me begin with the basal side. We already have several physicians in the market who have been prescribing Omnipod 5 off-label for basal-only patients before we received the indication for use. Omnipod 5 is incredibly user-friendly and is very well suited for these patients for various reasons. We will certainly promote it to them. The SECURE-T2D data clearly demonstrated that basal-only patients benefit significantly. About 20% of the study population were basal-only patients, and they experienced the same advantages as those on multiple daily injections. Therefore, it's a substantial benefit for them. We are focusing on the target market of insulin therapy patients who are not well-controlled, which includes both intensive users and basal users. As we expand our outreach to high-prescribing primary care practices, we will identify more of these patients. We are optimistic about both segments of the type 2 market. Regarding retention, that's an excellent question. Our customer base does include some type 2 patients, and our retention remains robust. While it mostly consists of type 1 patients, our retention is still strong. Over time, we expect to see that type 2 patients have various circumstances in their lives and multiple comorbidities. It’s likely that we will observe different subsegments within the type 2 population, with varying usage patterns and potentially some lower retention in specific areas. However, all of these patients contribute incrementally to our business, meaning they provide additional volume and patient growth. Over time, we will be developing more customized offerings for type 2 patients, which we will work on in the coming months and several quarters. Our goal is to collaborate with type 2 patients to ensure that their experience with Omnipod 5 is as simple as possible, allowing us to provide them with the same high level of retention and therapy experience that we have historically offered all our patients.

Operator, Operator

Our next question comes from Mike Kratky from Leerink Partners. Please go ahead. Your line is open.

Mike Kratky, Analyst

Hi, everyone. Thanks for taking our questions. Can you provide some additional color on how much of a commercial impact you've seen, either positive or negative from some of the CGM integrations that have transpired this year, both within your own products or competitors getting a bit of a head start? How meaningful of an impact would you say these integrations are having on new starts or your existing customer base or any commercial dynamics?

Jim Hollingshead, President and Chief Executive Officer

Thanks, Mike. I'll begin with that, and I don't know if Ana will want to add some comments. Our sensor integrations have been excellent for us and for our patients. Earlier this year in the U.S., we launched our G7 integration, which is a highly prescribed sensor in the market. We achieved significant success through specialty pharmacies and are now fully available in retail with the G7, which has materially contributed to our new customer acquisitions. We continue to start a lot of G6 patients as well in the U.S. market. Offering a choice of sensors has greatly benefited our patients and supported our growth in new customer starts. In Europe, we initially launched with the G6 integration and have recently introduced a Sensor of Choice integration in the U.K. and the Netherlands. In these markets, customers can choose between the G6 sensor and the Libre 2 Plus sensor, both of which are performing well. We are also excited to bring the Libre 2 Plus sensor integration to the U.S. by the end of the year, resulting in three available sensors for customers in the U.S. Each time we launch a new sensor integration, it provides more options for our customers, which benefits them and has contributed to our growth.

Ana Maria Chadwick, Chief Financial Officer

I’d like to share some insights about our recent iOS launch, particularly related to the G6 in the U.S. The success we’re experiencing, as seen through the number of downloads and customer feedback, boosts our confidence in our ability to continue expanding our offerings on iOS in the future. I just wanted to mention this perspective.

Operator, Operator

Our next question comes from Jayson Bedford from Raymond James. Please go ahead. Your line is open.

Jayson Bedford, Analyst

Good afternoon. Apologize for the background noise. So I have a clarification and a question. Just a clarification on the international strength. You mentioned the slight uptick in utilization. To be clear, there was no stocking benefit to quantify. This is just a natural occurrence when you launch Omnipod 5. That's the clarification. The question is just on your user base in the context of pricing, if 90% of the U.S. users are on Omnipod 5, 25% in Europe, how high can your European base go in terms of Omnipod 5 adoption?

Ana Maria Chadwick, Chief Financial Officer

Great. I'll take the first part here. In terms of our international strength and the utilization uptick, we view that as nothing to do with stocking. This is entirely to do with when you launch the new product, similar to what we saw in the U.S., probably at a little smaller degree, but people just get maybe a couple of two orders at once just to get some backups for their usage later. So we're seeing some of that similar dynamic in the international markets where we've launched.

Jim Hollingshead, President and Chief Executive Officer

Thank you, Jayson. Regarding the potential usage of Omnipod 5 in international markets, I anticipate a similar trend to what we've observed in the U.S. market, where Omnipod 5 becomes the preferred automated insulin delivery system, including among our existing customers. As we expand Omnipod 5 into international markets, I believe it will emerge as the dominant product in our lineup. However, there are some considerations to keep in mind. In Europe, for instance, customers are often locked into contracts. This means that transitioning from DASH to Omnipod 5 will depend on contract renewal cycles, which typically last around four years. As a result, the adoption may not be as rapid initially. Nevertheless, I expect Omnipod 5 to ultimately become our leading product in international markets. Additionally, based on our launches in Europe, Omnipod 5 is already the top-selling pump in those markets. This demonstrates its strong appeal. We anticipate significant growth in new customer acquisitions as we continue to roll out Omnipod 5 internationally.

Operator, Operator

Our next question comes from Matt Taylor from Jefferies. Please go ahead. Your line is open.

Matt Taylor, Analyst

Hi, thanks for taking the question. I guess I wanted to follow-up on the type 2. It's very exciting stuff. Your competitors put out some estimates with market research that they think the market could get to 25% penetration in a three to five-year time frame for intensive type 2 in the U.S. And I guess, I was just wondering what your thoughts were on that? Do you agree with that number directionally? Do you think that's in the ballpark? Have you done any research to confirm that?

Jim Hollingshead, President and Chief Executive Officer

Thanks, Matt. It's a great question. We're very bullish on type 2. We have such a great opportunity with type 2. And we're the first to market with AID. And we're the first to market and only AID in the market, with the products that overtook all of the AID players in the type 1 market. And if anything, I think we have a clear right to win in the type 2 market because Omnipod 5 has all of the benefits. It's so easy to use, easy to set up, available in pharmacies where patients get their insulin, easy access, pay-as-you-go, all the things we talk about all the time. So I think we have a very, very clear right to win the type 2 space. The SECURE-T2D data is really remarkable. And so we're very bullish on it. I think we said earlier in Q&A that over the next handful of years, we think penetration could double or triple in the type 2 space. We'll be the player that does that. It's very clear that we're developing the market. We're the ones who lead the market right now. We're number one in the market right now. And we're very optimistic about growth in the space. It's early days. We'll see where we can take it, but we think there's a big growth for us over the next few years in type 2.

Operator, Operator

Our next question comes from Matthew O'Brien from Piper Sandler. Please go ahead. Your line is open.

Matthew O'Brien, Analyst

Good afternoon. Thanks so much for taking the question. Would love to talk about the pharmacy channel a little bit. You've had a competitor on the durable side in that space over the last few quarters. And then yesterday, your noisy competitor also mentioned that they just got their first contract signed. So can you just talk about your ability to defend your position in that channel? And then more specifically, on the pricing side, to make sure, because I know they're going to push on the pricing side once they get bigger and bigger there. How do you defend your pricing within the pharmacy channel? Thank you.

Jim Hollingshead, President and Chief Executive Officer

Thank you for your question. I want to emphasize that we have a very strong presence in the pharmacy channel, largely because Omnipod aligns perfectly with it. The product is the pump itself, which is packaged conveniently and is available at the same location where insulin is obtained. We also benefit from Part D reimbursement, which supports pharmacy benefit reimbursement. Our product effectively serves all parties involved, making it easy for patients to use and for physicians to prescribe due to the full pharmacy reimbursement. Physicians can easily send prescriptions to local pharmacies. This system also benefits payers because we experience high member satisfaction among patients using Omnipod 5. Additionally, pharmacy benefit managers gain substantial revenue from the volume we generate through our channel and our rebate agreements. This creates a beneficial business model for us and all parties involved, reinforcing our strong position. Regarding pricing, we conduct annual negotiations for our PBM contracts, a process we are well-acquainted with. There is a mutual benefit involved concerning volume and rebates. Our relationships and agreements are well-developed thanks to years of effort; we have a multitude of contracts with PBMs. To clarify, we began our negotiations with our first PBM contract in 2016 and successfully signed it in 2017. We have been forming relationships with PBMs for over seven years now, giving us significant experience in this area, and we are confident in our ability to maintain our position.

Operator, Operator

Next question comes from Chris Pasquale from Nephron Research. Please go ahead. Your line is open.

Chris Pasquale, Analyst

Thanks. Can you guys have mentioned some of the work you're doing on fully closed-loop algorithms. It seems like, broadly, there's a push across the industry right now to develop offerings that would do a better job helping those patients who aren't quite as actively engaged with managing their own disease. Could you give us an update on where your work on that front stands? How you're thinking about it? Is this a solution for a narrow segment of users or something that has broader applicability? And then how close are you to having something that could be ready for commercial use?

Jim Hollingshead, President and Chief Executive Officer

Yes. Thanks, Chris. As you know, we've talked publicly; we talked at ADA about two separate and parallel algorithm development programs. But let me just start by saying something about our current algorithm. The Omnipod 5 algorithm is a great algorithm. It produces fantastic results. You can see from our real-world evidence, which includes all of our users, in effect, that we see all corners of usage, we have industry-leading time and range with very low hypoglycemia. And so our current algorithm also responds really well to missed boluses. So when Omnipod 5 senses a missed bolus, it will deliver a significant percentage of total daily insulin to bring the patient back into range. So our current algorithm performs really, really well at a population level and for all the individuals using it. Now having said that, we have two programs working on different areas with different concepts. One of which, I would say, is closer to a fully closed-loop algorithm. But both of them have been accelerated because of all the evidence we get off of actual patient usage. So even after the first 30,000 patients on Omnipod, which was quarters ago, we were able to see patterns of usage that allowed us to do in silico simulations. So we use our data sciences and big data capabilities to simulate adjustments to the algorithm, and that's what's allowed us to get into early clinical trials with two different algorithm programs that we've shared some of that data over the course of the last year. So we see real opportunity to drive improved algorithms and with a couple of different approaches, and we're happy to be able to accelerate that program. But we also know we're delivering great glycemic control and outcomes in the market right now.

Operator, Operator

Our next question comes from Joanne Wuensch from Citi. Please go ahead. Your line is open.

Joanne Wuensch, Analyst

Thank you so much for taking the question. I'm curious with just about a couple of things. Where to start? I think I'm just going to start with the impact of integrating Libre and G7. I mean does that create sort of a step-up opportunity for you in terms of new patients? And can you confirm, did you have positive new patient starts this quarter? Or is that more of a fourth quarter event year-over-year? Thanks.

Jim Hollingshead, President and Chief Executive Officer

Thank you, Joanne. The integrations with the sensors are beneficial for us, providing positive momentum. G7 has significantly contributed to our new customer growth in the U.S., and the launches of Libre 2 Plus have positively impacted us in the U.K. and the Netherlands. We believe that bringing the Libre 2 Plus integration to the U.S. will present another growth opportunity for us. Regarding growth, we have seen clear sequential increases in new customer starts in the U.S. for both type 1 and type 2 diabetes. MDI also saw growth in both categories. We have consistently mentioned throughout the year that we expect sequential growth every year, and we achieved that in Q3. Looking ahead to Q4 in the U.S., we anticipate continued sequential growth alongside year-over-year growth in new customer starts. Overall, we expect both Q3 and Q4 in the U.S. to show clear year-over-year growth for the second half of the year due to these trends.

Operator, Operator

Our next question comes from Matt Miksic from Barclays. Please go ahead. Your line is open.

Matt Miksic, Analyst

Hi, thank you for the question. I wanted to ask about your retention rate and the increase in new patient starts. Jim, you mentioned surpassing competitors in the industry with your pump format. Could you explain how you gauge retention and whether investors can get an insight into its trends? Is it consistently in the mid to upper 90s, or does it fluctuate? Any additional details would be helpful. Thank you.

Jim Hollingshead, President and Chief Executive Officer

Sure. Thanks, Matt. First, let me start with the data. The vast majority of our users in the U.S. market are on Omnipod 5. So that's cloud data. So it's very high fidelity. We can tell when somebody has started. We can tell when somebody has stopped. So we have really clear data on this. Our retention remains really high. And so it runs in the, I'm going to say, the low 90s. I will look around the room and make sure that's right. So it runs in low 90s, and it's very stable. It really doesn't move very much period-over-period. It's a very, very stable thing. We're very focused on creating and delivering an experience with our customers that makes it really easy for them to stay on, and we're going to build and continue to build capabilities in that area. But that's to give you a sense of it. It's very stable. It's very high. Very predictable.

Operator, Operator

Our last question will come from Bill Plovanic from Canaccord. Please go ahead. Your line is open.

Bill Plovanic, Analyst

Thanks for the question. I would like to understand the impact of launching the AID system on the commercial organization. As you scale up to target different customer channels, what effect has this had on patient service? Has there been a decline over time, possibly due to a greater focus on sales rather than ongoing patient care? Thank you.

Jim Hollingshead, President and Chief Executive Officer

Thank you for the question. We are fully committed to creating a completely unique end-to-end customer experience. Internally, we emphasize that this is what we provide. Our customer experience starts from the moment someone is diagnosed, whether it's for themselves or their child, and extends to life-long support with pods. The cloud connectivity of Omnipod 5 gives us a distinctive opportunity and capability to achieve this. Our customer service, care, and product support are all top-notch. When we launched Omnipod 5 in the U.S. in August 2022, demand was so high that we struggled to handle phone inquiries for a while. We weren't adequately prepared to support our customers as they started using the product and received training. Those challenges are now behind us. We have enhanced our commercial capabilities, customer care, inside sales, and product support. We are dedicated to providing the best end-to-end customer experience for Omnipod users now and in the future, and we are enthusiastic about this unique opportunity.

Operator, Operator

I'm showing no further questions at this time. I would like to turn the conference back to Jim Hollingshead.

Jim Hollingshead, President and Chief Executive Officer

Thank you all for joining us today. We have strong sustainable competitive advantages that allow us to deliver market-leading technology, market-leading growth, and a strong financial foundation that positions us to continue to drive long-term value creation. Our type 2 label expansion is a game-changer and another major milestone for all stakeholders, including investors, employees, HCPs, and most importantly, our customers. I'm proud of the work our team is doing to disrupt the diabetes market and improve the lives of people with diabetes. We have a clear strategy to expand the Omnipod 5 platform, drive growth in the U.S. in both type 1 and type 2, and accelerate international growth and expansion. We continue to make significant progress in each of these areas and have strong momentum across our organization. I want to thank all of our Insulet employees for their dedication, passion, and deep commitment to further our mission to simplify and improve the lives of people with diabetes around the globe. Thank you everyone for joining us today, and we look forward to updating you next quarter.

Operator, Operator

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