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Edited Transcript of PODD.OQ earnings conference call or presentation 4-Nov-20 9:30pm GMT

·61 min read

Q3 2020 Insulet Corp Earnings Call BEDFORD Nov 12, 2020 (Thomson StreetEvents) -- Edited Transcript of Insulet Corp earnings conference call or presentation Wednesday, November 4, 2020 at 9:30:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Deborah R. Gordon Insulet Corporation - VP of IR * Shacey Petrovic Insulet Corporation - President, CEO & Director * Wayde D. McMillan Insulet Corporation - Executive VP,CFO & Treasurer ================================================================================ Conference Call Participants ================================================================================ * Brandon Vazquez William Blair & Company L.L.C., Research Division - Associate * Briana Michele Warschun Jefferies LLC, Research Division - Equity Associate * David Ryan Lewis Morgan Stanley, Research Division - MD * Jeffrey D. Johnson Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst * Joanne Karen Wuensch Citigroup Inc. Exchange Research - Research Analyst * Lawrence H. Biegelsen Wells Fargo Securities, LLC, Research Division - Senior Medical Device Equity Research Analyst * Patrick J. Bartoski Piper Sandler & Co., Research Division - Research Analyst * Robert Justin Marcus JPMorgan Chase & Co, Research Division - Analyst * Ryan Blicker Cowen and Company, LLC, Research Division - VP of Healthcare * Travis Lee Steed BofA Merrill Lynch, Research Division - VP ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good afternoon, ladies and gentlemen, and welcome to the Insulet Corporation Third Quarter of 2020 Earnings Call. (Operator Instructions) 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 R. Gordon, Insulet Corporation - VP of IR [2] -------------------------------------------------------------------------------- Good afternoon, and thank you for joining us for Insulet's Third Quarter 2020 Earnings Call. With me today are Shacey Petrovic, President and Chief Executive Officer; and Wayde McMillan, Executive Vice President and Chief Financial Officer. The replay of this call will be archived on our website, and the press release discussing our third quarter 2020 results and fourth quarter and full year 2020 guidance is also available in the IR section of our website. Before we begin, I'd 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. We ask that you please refer to the cautionary statements contained in our SEC filings for a detailed explanation of the inherent limitations of such forward-looking 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, and we believe that they are helpful to investors, analysts and other interested parties as a measure of our comparative 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 basis, and all revenue growth rates will be on a constant currency basis. And with that, I'll turn the call over to Shacey. -------------------------------------------------------------------------------- Shacey Petrovic, Insulet Corporation - President, CEO & Director [3] -------------------------------------------------------------------------------- Thanks, Deb. Good afternoon, everyone, and thank you for joining us. On today's call, I'll update you on our progress with our strategic imperatives and the many reasons we're excited about the future. Wayde will discuss our financial results and outlook for the rest of this year, and then we'll open the call to your questions. We remain in challenging unprecedented times. The progress we've made despite this challenging environment demonstrates the durability of our recurring revenue business model, Omnipod's differentiated form factor and the commitment and resilience of the Insulet team. Together, our team has cared for our users who need our support, advanced our innovation pipeline and delivered another remarkable quarter on all aspects of our business. We achieved third quarter revenue growth of 20%. Our U.S. and International Omnipod product lines each achieved another record revenue quarter. New customer starts were stronger than expected, and we now expect to deliver our fifth consecutive year of 20% revenue growth despite the pandemic. We also expect to finish 2020 above our pre-COVID expectations at the start of the year. While delivering strong performance, we are also building a foundation to drive adoption in our enormous and growing market over the long term. In just the markets we currently serve, there are approximately 10 million people living with insulin-dependent diabetes who could benefit from improved quality of life and better outcomes with Omnipod. This market opportunity will grow significantly as we move into new geographies, expand awareness and access to our technologies and bring our game-changing consumer-oriented innovations to market. Our highest -- our long-term growth will be supported by the manufacturing expertise required to produce the highest-quality products while increasing gross margins. We are investing in each of these areas to build enduring advantages that will enable us to improve the lives of people with diabetes for many years to come. I'll start with expanding access and awareness. We are establishing market access so Omnipod is easily available regardless of age, type of diabetes or payer. Our access through the U.S. pharmacy channel offers customers an unusually simple onboarding experience. Benefit checks are swift, co-pays are low and don't come with a large onetime cost, and virtual training is quick and effective. While COVID-19 has presented challenges, it also has pushed us to embrace virtual training, which is now preferred by users and providers. We expect these newly developed capabilities to continue to provide value as we scale our business. Approximately 80% of our new customers in the third quarter were multiple daily injection users attracted to Omnipod's ease of use and unique form factor. Additionally, approximately 1/3 of our U.S. new customers were type 2, up from last quarter. Fueling the success with MDI and type 2 is Omnipod DASH. Since launch 18 months ago, awareness of Omnipod DASH's unparalleled simplicity has grown, and we have built broad pharmacy access in the United States. By the end of Q3, we had secured coverage for 65% to 70% of covered lives for Omnipod DASH. With Omnipod DASH in the pharmacy, MDI users no longer pay large upfront costs or get locked into a 4-year contract to try an insulin pump. They can start on Omnipod with a free trial and no lock-in period. We are thrilled to be knocking down barriers and enabling Omnipod to bring improved quality of life and outcomes to more people with diabetes. Given our progress on establishing broad market access through the pharmacy channel, the time was right to launch a small-scale direct-to-consumer advertising pilot. We launched the pilot in September and have been learning a ton. While we know our DTC is working to raise awareness, we are still monitoring key performance metrics, such as lead conversion rates and retention of DTC-generated customers. We know increased awareness is key to growing adoption, and we are delighted to be in such a strong position to invest and explore this area. While our world has been challenged with the pandemic, our team has not missed a beat in advancing our innovation pipeline. Omnipod 5 is the world's first tubeless wearable AID system and the only one fully controlled by a user's mobile phone. With Omnipod 5, we will give our customers freedom, simplicity and integration with personal consumer technology like no other system on the market today. Our automated insulin delivery platform is transformative technology with potential applications in a variety of segments. And our initial launch of Omnipod 5 for type 1 diabetes users aged 7-plus marks our first step. We are excited about the impact it will make in the market and on the lives of people with diabetes. Over time, we will be investing in clinical studies to first explore and then prove Omnipod 5's utility in more market segments. We are thrilled to have recently completed our Omnipod 5 pivotal trial and remain on track to launch in the first half of this coming year. While our team prepares for FDA submission, virtually all of the trial participants have transitioned into a pivotal extension phase. They will remain on product and provide us with critical additional data to support Omnipod 5's value proposition with payers and with clinicians. This data will also help inform our future innovations beyond Omnipod 5. We are excited to share our clinical results. And given ATTD has been delayed, we are evaluating the best alternative to do so. Our Omnipod 5 preschool pivotal study with 2- to 6-year olds is underway with all 80 participants on product. Omnipod ranks #1 within this demographic, and we are delighted to have kicked off our pivotal study to make Omnipod 5 available down to age 2. Our goal is to have the expanded indication by the end of 2021 for this young population and their caregivers. Additionally, following the FDA's acceptance of our type 2 clinical study protocol in September, we began enrollment. This feasibility study will include 30 to 40 participants, each wearing Omnipod 5 for approximately 2 months. As we learn more from our growing type 2 user base, we know there is a large market for an appropriate type 2 AID system. We are confident an Omnipod AID system will provide great value for the type 2 population, and we expect our early clinical work will result in important learnings. Omnipod's form factor, our pay as you go model in the pharmacy and our experience developing exceptionally simple products position us uniquely to grow pod use among type 2 users. While we prepare for Omnipod 5 submission and commercial launch, we are also making progress on our future products. We are advancing our collaborations with Dexcom and Abbott, who are rapidly and meaningfully raising awareness of diabetes technology among type 1 and type 2 users. CGM is helping users recognize that they need better insulin delivery solutions, and CGM adoption is paving the way for generations of Omnipod products to meet these needs. In addition to integration with our next-generation sensors, we have exciting work underway to make Omnipod 5 compatible with iOS, and we continue to advance our algorithm to expand our lead in simplicity and ease of use. Now turning to our progress in our international markets. We have seen a gradual recovery in our European markets. And in September, we announced the full commercial rollout of Omnipod DASH. Our teams have done a remarkable job preparing our markets to support this launch, and our customers are loving the product. Now 100% of our new customers in Europe start on Omnipod DASH. In September, we announced the start of our geographic expansion efforts, and we are on track to enter 5 new markets by early 2021. We're taking a deliberate approach to our international expansion as we build our capabilities in each market and leverage our existing teams and strong distributor relationships. While it will take time to broaden our presence. Over the longer term, our expanded global footprint will significantly increase our total addressable market. Finally, turning to operational excellence. In order to meet the growing demand for Omnipod, we are increasing capacity in both the United States and China. We are making considerable progress with the ramp of our first 2 highly automated U.S. manufacturing lines, and we are nearing completion of our third line installation, which we expect will produce sellable product next year. We have also made an investment in another contract manufacturer in China, allowing us to leverage our local supplier base and highly experienced team to quickly scale. These investments strengthen our global manufacturing and supply chain operations and ensure that, over the long term, we have the capacity and redundancy to meet increased global demand for our products. In summary, the world remains challenged with the impact of the global pandemic. However, the compelling benefits of Omnipod, the uniqueness and durability of our recurring revenue model and the outstanding execution of our team provides significant insulation for Insulet. We delivered strong financial and operational performance, and we are taking the appropriate steps to expand our innovation pipeline, grow our addressable markets and enhance our global manufacturing capabilities. Our team is focused on finishing the year strong and sustaining our momentum as we move toward launch of Omnipod 5 in the first half of 2021. And most importantly, we remain focused on improving the lives of people living with diabetes. I will now turn the call over to Wayde. -------------------------------------------------------------------------------- Wayde D. McMillan, Insulet Corporation - Executive VP,CFO & Treasurer [4] -------------------------------------------------------------------------------- Thanks, Shacey. Our third quarter marked a continuation of our strong performance as we once again delivered double-digit revenue growth, including record quarterly revenue for our diabetes product lines. We've maintained a solid track record of performance largely due to our loyal customers and the commitment and execution of our global Insulet team. We are steadily advancing our strategic imperatives and delivering on our mission to improve the lives of people with diabetes. Turning to the third quarter financial results. We delivered 20% revenue growth ahead of our expectations and $9 million above our guidance range. Total Omnipod growth was 18%, which was the major driver of our outperformance at $6 million above our guidance range. Drug delivery revenue also finished ahead of our expectations with growth of 47%, which was $3 million above our guidance range. In our total Omnipod business, the pandemic was a smaller headwind than expected. It negatively impacted global new customer starts in both the second and third quarters. This creates a compounding impact on our revenue, which we began to see in the third quarter, and will continue to see an impact into the fourth quarter and first half of 2021. Despite this headwind as a result of our year-to-date strong results and continued execution, we now expect full year 2020 total Omnipod revenue growth to exceed our start-of-the-year pre-COVID expectations. In Q3, we exceeded our guidance for new customer starts. We expected the pandemic would lower our beginning-of-the-year expectations by 30% to 50%. Our results were favorable in both the U.S. and international regions with a combined impact slightly less than 30%. Additionally, both the U.S. and international had significant sequential improvements, resulting in approximately half of the impact in Q3 versus Q2. Attrition and utilization for total Omnipod were stable sequentially. Looking by product line, U.S. Omnipod revenue grew 21%, exceeding our guidance range of 14% to 16%. Q3 revenue included a headwind of an approximate $4 million decrease in distributor channel inventory levels, partially offsetting estimated channel inventory built in the first half of the year, mainly due to the pandemic. Our strong growth was driven by further expansion of our customer base, increased Omnipod DASH adoption and the mix benefit from the shift to the pharmacy channel, including the premium on DASH, where we provide the PDM to customers at no charge. In the third quarter, Omnipod DASH drove approximately 65% of our U.S. new customer starts, and we grew volume through the pharmacy channel to over 30% of our total U.S. volume. International Omnipod revenue grew 12% compared to our guidance range of 9% to 11% primarily due to better-than-expected new customer starts. Channel inventory growth in the quarter of an estimated $4 million to $5 million was primarily driven by stocking shipments of Omnipod DASH and was similar to the amount of estimated increased distributor orders we experienced in Q3 2019. Drug delivery revenue increased 47% compared to our guidance range of 23% to 28%. Similar to Q2, the overachievement was due to our partners' increased forecast related to the current environment. Turning to gross margin. We delivered 65%, up 80 basis points, exceeding our expectations. Key drivers of our gross margin expansion included improving performance of our U.S. manufacturing as we ramp our newly implemented automated lines as well as the favorable revenue mix from the shift to higher volume through the pharmacy channel. Also contributing was favorable product line mix. While positive foreign exchange was a 60 basis point tailwind, it was offset by a 60 basis point headwind from onetime COVID-related costs of $1.1 million. Operating expenses in the third quarter were largely in line with our expectations on a dollar basis and slightly lower as a percentage of revenue given our strong top line performance. Expenses increased on a dollar basis primarily due to the marketing costs as well as R&D and clinical spend for Omnipod 5. Adjusted EBITDA as a percentage of revenue was 18.1% in the third quarter, up from 15.4% in the prior year. Our profitability improvement benefited from operations with improved gross margins and operating expense leverage and the change in other income. Turning to cash and liquidity. We remain in a strong position with our earliest debt maturing in 2024 and low cash interest expense. We ended the third quarter with $897 million in cash and investments. Subsequent to Q3, we raised an additional $130 million of cash related to building and equipment financings as these type of arrangements help to reduce our overall cost of capital. The additional cash further strengthens our position and allows us to continue to invest in our strategic imperatives. Our investments are primarily to scale manufacturing and supply chain operations, capacity as well as for R&D programs, global commercial and sales force expansion and international product and geographic expansion. We are uniquely positioned to drive rapid growth by serving a large and underpenetrated market, and our strong cash position provides us with capital to further strengthen our foundation for long-term sustainable growth. Now turning to our revised outlook for 2020. As a result of third quarter revenue that exceeded expectations, we are raising our total company full year 2020 revenue guidance to growth of 20% to 21%, up from our previous expectations of 17% to 19% and above our beginning-of-year estimate. This includes raising total Omnipod revenue to a range of 21% to 22%. Our total Omnipod growth rates are now back in line with our original guidance set at the start of the year pre COVID, which is a testament to the resilience of our durable annuity model and the execution of our Insulet team. By product line, for U.S. Omnipod, we are raising our expected revenue growth to 23% to 24%; and for international Omnipod, we are raising our expectations to 18% to 19%. Although COVID continues to create uncertainties and it is difficult to predict the progression of the pandemic or the probability of a resurgence, we now expect that global new customer starts for the full year of 2020 will improve to approximately 75% of our beginning-of-the-year estimate. Despite the challenging environment, our global diabetes business remains well positioned to generate strong growth this year as well as in 2021 and beyond. Lastly, for drug delivery, we are updating our expected revenue growth to 4% to 6% resulting from the increased forecast from our business partner. Turning to the rest of the P&L. As a result of our outperformance in the third quarter and stronger revenue outlook, we are raising our full year 2020 gross margin guidance to approximately 64%, up from approximately 63%. This includes the headwind of $9 million to $10 million or approximately 100 basis points of estimated onetime costs related to COVID safety and mitigation efforts versus our prior guide of $7 million to $10 million. We now expect 2020 capital expenditures will be below prior year levels due to projects coming in favorable to estimated spend and due to timing. Our long-term financial strategy and capital deployment plans remain unchanged, and we, therefore, expect capital expenditures to grow again next year to support scaling manufacturing and supply chain operations capacity as well as advancements in our innovation pipeline and commercial and international expansion. For full year 2020 adjusted EBITDA as a percentage of revenue, we continue to expect to come in at the low end of our previously stated 13% to 17% range. Turning to fourth quarter 2020 guidance. We now expect total company revenue growth of 7% to 11%. This includes total Omnipod revenue growth of 10% to 14%, which, as a reminder, reflects the compounding of lower new customer starts from the prior 2 quarters related to the pandemic. By product line, we expect U.S. and international Omnipod revenue each to grow 10% to 14% and drug delivery to decline 17% to 23%. In terms of new customers, we now expect global new customer starts to improve in the fourth quarter to a range of 15% to 25%, less than our beginning-of-the-year expectations. This compares to the 25% impact we guided to on our Q1 and Q2 calls. In conclusion, we achieved strong growth year-to-date despite the impact from the global pandemic. This speaks to the power of our differentiated market position through product innovation and durable recurring revenue model. Our innovation pipeline is strong, and our financial position is sound. We are focused on finishing the year strong and building momentum as we enter 2021. Assuming market conditions stabilize next year, we remain on track to deliver our 2021 targets of $1 billion in revenue, gross margin in the range of 67% to 70% and operating income as a percentage of revenue at the low end of mid-teens. With that, we'll turn the call over to the operator for Q&A. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Our first question comes from the line of Margaret Kaczor from William Blair. -------------------------------------------------------------------------------- Brandon Vazquez, William Blair & Company L.L.C., Research Division - Associate [2] -------------------------------------------------------------------------------- This is Brandon on for Margaret. First, if I could just focus on the Q4 guide. Can you just talk about what kind of maybe COVID headwinds are baked into that? We've obviously seen a lot of resurgence of COVID globally. So are -- does that kind of bake in things getting worse? Or does it kind of assume that things stay the same as we go through the fourth quarter? -------------------------------------------------------------------------------- Wayde D. McMillan, Insulet Corporation - Executive VP,CFO & Treasurer [3] -------------------------------------------------------------------------------- Brandon, it's Wayde. I can start with that one, and it's a good place to start actually because this is obviously a major driver in the business today. And it's really different in the U.S. and international, as you said. So if we talk about the U.S. first, we've been performing quite well in the U.S., and new customer starts have been below our beginning-of-year expectations in Q2 and Q3. But we've been building momentum in the business, and Q4 is going to be pretty close to Q4 in the prior year. And just a reminder, Q4 and the prior year was our all-time-highest new customer starts. And so we got a really tough comp in Q4. But in the U.S., the momentum has been building. We've got a lot of things driving that momentum. DASH is still a primary driver for us. The move into type 2 is still early. The pharmacy model with pay as you go is working well. We've made investments in our commercial business and expanding the sales force. And then our teams have done a great job ramping the virtual training. So there's just a lot of positives that are somewhat offsetting those headwinds from new customer starts, and as a result, we still got double-digit growth in our guide. And so for the U.S., it's going to be pretty close. If we can get to the high end of our guide or even above, then new customer starts are going to be pretty strong for us in Q4. From an international standpoint, it's a different story. The recovery has been slower. And as you mentioned, we've seen recently a few countries going more back into a lockdown. And so in speaking with our field teams there, they do anticipate it's going to be more challenging. But what's different than Q2, when this really caught everybody by surprise, is our teams are much more effective now at still staying in contact with their customers, finding ways to connect with them. And DASH is a great -- it's just great timing for us to be launching DASH because it gives our teams an opportunity to still get those meetings with physicians and with customers. And so we do think that new customer starts will continue to be more of a headwind above or at the high end of this range for us, but our teams are doing a better job. And then there's lots of momentum. I mentioned DASH newly launched internationally, but we've made sales force expansion there, and we're also expanding into new countries. And so there's a lot of momentum building in behind this pandemic. And so I think we're going to continue to do that. But at the end of the day, the anticipated headwinds, to the extent we can, I mean, it's obviously very difficult to predict how much impact the pandemic will have. But we've built the assumption into the high end and low end of our guidance ranges, and just depending on how impactful it is, it should land us in the range. If we see something like Q2 again, that was pretty extreme, and I think that would -- that would be something that would probably push us out of the range. -------------------------------------------------------------------------------- Brandon Vazquez, William Blair & Company L.L.C., Research Division - Associate [4] -------------------------------------------------------------------------------- Great. That's really helpful color. And then the last one for me is, I appreciate it's probably too early to get into specific numbers for 2021, but maybe what might be helpful is to just kind of -- how are you thinking about '21 internally about what kind of COVID catalysts -- whether it be a vaccine, whether a widespread available vaccine, what kinds of catalysts are you looking for to kind of get back to normal pre-COVID levels? And on the same token, does COVID potentially slow the rollout of Omnipod 5 given that, that maybe needs a little bit more hands-on training given it's a closed loop? Or perhaps that's an incorrect assumption. -------------------------------------------------------------------------------- Shacey Petrovic, Insulet Corporation - President, CEO & Director [5] -------------------------------------------------------------------------------- Sure. Thanks, Brandon, for the question. And I think what we had said at the beginning of this year is that we did expect to see continued improvement throughout the year, and then we were hoping for normalization in 2021. I don't want to sort of predict what's going to happen in 2021, but I think it's great to see where we are now predicting to close this year because it means we're ahead of what we expected in terms of the potential impact of COVID. And regardless of what happens with the vaccine and the macro environment, our teams are getting great at managing and making an impact in this environment. And that's because of some of the things that we just mentioned, our virtual training tools and various capabilities that we've built. In terms of Omnipod 5, that is a product that we have spent so much design work and thinking and organizational focus on simplicity and ensuring that everything from the onboarding experience through to the use experience of the system is simple. And it is designed to be a product that is simple enough that MDI users and kids can easily get onto and be successful with. So I don't anticipate that COVID is going to slow us down. There's just incredible enthusiasm in the market and internally with all of us to get that product onto the market, and we're going to make that happen regardless of what's happening in the macro environment. -------------------------------------------------------------------------------- Operator [6] -------------------------------------------------------------------------------- Our next question comes from the line of Matthew O'Brien from Piper Sandler. -------------------------------------------------------------------------------- Patrick J. Bartoski, Piper Sandler & Co., Research Division - Research Analyst [7] -------------------------------------------------------------------------------- This is Patrick on for Matt. I just wanted to follow up just a little bit on the COVID environment. You implemented your financial assistant program in April. Can you give us a sense for the participation within that program? And I know it runs until December of this year, but as some people may roll off their COBRA insurance plan, do you envision this dynamic to further the utilization of that program? Or any color there would be really appreciated. -------------------------------------------------------------------------------- Shacey Petrovic, Insulet Corporation - President, CEO & Director [8] -------------------------------------------------------------------------------- Sure, Patrick. And I'll ask Wayde to give a little bit more color on utilization of the program. But at a high level, I'll say that it's something that I think we, as a company, are very proud of and that we were out front and able to offer this assistance to our users. This is very much about ensuring that -- while COVID is negatively impacting in an outsized fashion our Podders, that they can remain on product. And so we're proud of the program. And our intent is to -- we're committed through the end of this year. If we feel like that need may persist, then we will certainly evaluate continuing the program. -------------------------------------------------------------------------------- Wayde D. McMillan, Insulet Corporation - Executive VP,CFO & Treasurer [9] -------------------------------------------------------------------------------- Yes. And on the numbers, Patrick, they have been quite small, actually. I think you mentioned COBRA, but there's been many other options for people including Medicaid in the states or alternative insurance in the household. So we haven't seen that many people on the program. But having said that, we've always had a financial assistance program, and we've had several -- quite a few people on that over the years. And so this is really an enhancement to that program. And we haven't met the number of people that we had on our original program yet, so it's not like it's been a significant pickup at this point. But as Shacey said, we're really happy to have it in place. If we have current customers that can't afford the product given the current situation they're in, we're more than happy to backstop them and help them continue with their therapy until they can access it through normal channels again. -------------------------------------------------------------------------------- Patrick J. Bartoski, Piper Sandler & Co., Research Division - Research Analyst [10] -------------------------------------------------------------------------------- That's really helpful color, guys. And my quick follow-up, I'd love to hear more about the DTC campaign efforts that you're making. I know you started a limited national DTC. That seems to be doing well, and you'll have more KPIs to kind of gauge how successful that program is. But how should we think about the DTC efforts into next year with some of the COVID impact still kind of percolating and Omnipod 5 coming up? Like, how are you thinking about the broader rollout for that DTC campaign as you round the corner of '20 and into '21? -------------------------------------------------------------------------------- Shacey Petrovic, Insulet Corporation - President, CEO & Director [11] -------------------------------------------------------------------------------- Sure, Patrick. And it's funny you're asking the questions that we're asking ourselves internally. I mean one of the reasons why we wanted to do DTC this year before launching Omnipod 5 is that we really wanted to learn about the impact, learn about the messaging that's most effective, the channels that are most effective. We've been expanding our DTC over the last couple of years through digital channels, but this is the first time that we've really stuck our toe into television. And it's clear from the early numbers that we've made an impact on awareness. It certainly is driving increased awareness. And what we're looking at now is just how does that awareness convert into actual customers, over what period of time and to what degree. And then are those customers -- because remember, we have eliminated all barriers to getting on the product. The patient can get onto Omnipod in the pharmacy without any upfront cost and basically with a free trial. And so we want to make sure that those patients stay on the product to the extent that our customer base does. So those are the things that we're evaluating before we determine to what extent we increase our investment in DTC in 2021. And our plan is to give a bit more color on the next call when we're laying out (technical difficulty) And we should have learned more by then and have a better point of view in terms of expanding (technical difficulty) But I think what's exciting is that now that we have the position that we have in the pharmacy channel, we actually have the scale and the position to kind of support increased demand. And so that is really exciting to us. In the DME channel, getting patients through the process and onto the product is a bit more cumbersome. And for patients to be able to walk into the pharmacy, get the product, have no upfront cost and have that sort of easy onboarding experience, it's the right time to start to learn more about DTC, and we're encouraged. And stay tuned. -------------------------------------------------------------------------------- Operator [12] -------------------------------------------------------------------------------- I show our next question comes from the line of Robbie Marcus from JPMorgan. -------------------------------------------------------------------------------- Robert Justin Marcus, JPMorgan Chase & Co, Research Division - Analyst [13] -------------------------------------------------------------------------------- Great. Congrats on a really good quarter. I have 2 questions. First, Shacey, I was hoping you could give us your thoughts on the status of new patients and where they're coming from. I'm sure a lot of it's DASH. I'm sure a lot of it's the form factor, the lower out of pocket. But how should we think about, when you have Horizon 5 (sic) [Omnipod 5], one of your competitors with an integrated solution is outpacing you in terms of new patient growth, and a lot of it has to do with the AID solution? So how should we think about, as we set our models, the benefit from DASH but also the benefit that's coming once you have a competitive AID solution? -------------------------------------------------------------------------------- Shacey Petrovic, Insulet Corporation - President, CEO & Director [14] -------------------------------------------------------------------------------- Yes. I think those are great questions and I think really highlight why we're so excited about Omnipod 5. You see the growth that we're driving. Wayde said, in Q4 in the U.S., we could be back to an all-time-record quarter at the high end of our guidance for new patients. So we're seeing a great recovery. That recovery is being driven as it frankly always has been off of Omnipod's form factor. 80% of new users are coming from MDI. So we continue to grow the overall market, and that's being driven by Omnipod's form factor, by pharmacy access in both type 1 and type 2 MDI users. That is a population that is just very attracted to DASH and its simplicity. I think we'll continue to see that segment adopt Omnipod based on its form factor and based on the out-of-pocket economics. Actually, in the pharmacy channel, the vast majority of our patients are accessing Omnipod for less than a $50 co-pay. So it's very economic. It's very attractive in terms of form factor and the access channel, and so those are driving demand today. I think what you're highlighting is why we can't -- we're so excited about Omnipod 5, is that you can really see the power of integration with the Dexcom sensor and AID. And up until the next few months when we get -- or the next several months when we get Omnipod 5 out into the market, patients have had to choose between what we know is a preferred form factor and integration with a Dexcom sensor. And obviously, in the first half of 2021, they'll no longer have to choose. And so I'm not going to make predictions on exactly how that's going to change our trends. I think we certainly expect it to be an accelerator. And I think the question is, what changes in terms of MDI users coming onto the product? Or do we see more pump users coming onto the product? Because remember, they can adopt Omnipod 5 without an upfront cost and without a 4-year lock-in period. And so we're really excited to basically check every box that patients are looking for in terms of an insulin delivery system and an AID system in particular with Omnipod 5. -------------------------------------------------------------------------------- Robert Justin Marcus, JPMorgan Chase & Co, Research Division - Analyst [15] -------------------------------------------------------------------------------- Great. And maybe one for Wayde. Wayde, you've clearly demonstrated a conservative approach to guidance since you've come in as CFO and, particularly, I'd say, a very conservative stance to guidance during COVID-19, and, I understand, with good reason, all the unpredictability, especially with cases starting to rise again. I think I asked you this last question, and you far [exceeded] your guidance range. But I'm going to ask you again on this call. Can you help us understand some of the underlying metrics that get you to a range that I would say people would say seems fairly conservative? Is there large destocking that we should think about? Are you willing to give us maybe what volume versus mix price was in third quarter? And is that going to be materially different in the fourth quarter? Just trying to get a sense of some of the underlying trends here. And how much of it is conservatism versus just a downward move in the numbers? -------------------------------------------------------------------------------- Wayde D. McMillan, Insulet Corporation - Executive VP,CFO & Treasurer [16] -------------------------------------------------------------------------------- Yes. I think, Robbie -- first of all, glad you brought up guidance because we're very happy that we chose to issue guidance back in Q2 at the front end of this pandemic. It was a big decision. But when we looked at the recurring revenue model that we're in and how that really defends against a 1-quarter impact like the pandemic happening in Q2 and that we were going to see potential new customer starts impacting us for a few quarters, it compounds. And so that -- it's really math, and it's -- our new customer starts over a few quarters, they compound. Q4 ends up with 3 quarters, including Q2, which was the lowest in it. So that's why we have a bigger headwind in new customer starts in Q4 than we've seen. The comment on conservatism, I mean, I'll take that every time because we held guidance, and we did it because we wanted to make sure people understood our business model and that we could articulate our business by putting stakes in the ground and adding additional metrics so we could talk to it. The major drivers of our business, like you said, are mostly volume. And our business is very much a volume business now. As we sell-through the pharmacy, we start to get into more and more distribution channels. There will be other ways for people to access our product over time. So it definitely becomes a volume business. And so for us, mix plays an important component today as it moves -- as we move customers from our traditional DME and direct channels into the pharmacy. And the premium that we get for the pay as you go model because we're giving the PDM for no charge. Those are dynamics today, but they're far outweighed by the volume increases in the business. -------------------------------------------------------------------------------- Robert Justin Marcus, JPMorgan Chase & Co, Research Division - Analyst [17] -------------------------------------------------------------------------------- Got it. Appreciate it. And just one very quick clarification. Are there any major conferences to present the pivotal data now that ATTD has been postponed? Or should we expect it in the label? -------------------------------------------------------------------------------- Shacey Petrovic, Insulet Corporation - President, CEO & Director [18] -------------------------------------------------------------------------------- Yes. Thanks, Robbie. We are evaluating that. We had a great forum with ATTD and our clinical investigators being invited to share the data. But obviously, we were just recently notified that it's been delayed until May. So we're looking to see are there other appropriate forums for us to get it out there. And there's just a lot of moving pieces. We -- obviously, the most important thing is that we get FDA clearance and get to launch in the first half of next year. And so we don't want to get the data out ahead of that and maybe ruffle feathers at the FDA. So we're looking at our options, and we certainly understand, and we're enthusiastic to get it out there as soon as possible, but I don't have specifics to provide today. -------------------------------------------------------------------------------- Operator [19] -------------------------------------------------------------------------------- I show our next question comes from the line of David Lewis from Morgan Stanley. -------------------------------------------------------------------------------- David Ryan Lewis, Morgan Stanley, Research Division - MD [20] -------------------------------------------------------------------------------- Wayde, I wonder if -- next year is an interesting year when we think about on Omnipod 5 launching, certain margin considerations that you've talked about a fair amount this year and then, of course, COVID impacting new patient starts, which could sort of bleed into early part of 2021. Is there anything sort of high level we should be thinking about as we think about models next year in terms of new patient starts, margins, mix of business? Any considerations at all that could be helpful as we think about '21 modeling? -------------------------------------------------------------------------------- Wayde D. McMillan, Insulet Corporation - Executive VP,CFO & Treasurer [21] -------------------------------------------------------------------------------- Yes, I think you just checked off the major ones, David. And let's start with COVID because this is one of the ones that's harder to predict for us. We've got this progression. We've seen significant improvement from Q2 into Q3. We're expecting a pretty big step-up in the U.S. At the high end of our guide, we're only a few percentage points off our beginning-of-year estimate, and that was a pretty strong estimate. So we're anticipating pretty strong recovery in the U.S. If we get there, then it really is about how does COVID impact us in 2021. And that's the unknown, and we'll obviously know more after we get through Q4 and we're set up to give our 2021 guide. We always give our guide at our Q4 call. And so we'll have a much better feel, I think, for what, at least, the early part of 2021 will look like in the U.S. Outside the U.S., international, we're seeing more and more lockdowns already here in the quarter. And so that's -- so far, we feel comfortable we'll be in the range that we've provided for Q4 for international. But again, next year, it makes it a much more challenging thing. So with COVID, obviously, that's a question mark. For the other drivers that you mentioned, Omnipod 5, that one comes -- first half of the year will be our limited market release. And so we won't see a material impact until the second half of the year. So from a modeling standpoint, to your question, David, I would think about Omnipod 5 starting to ramp in the second half of the year. Gross margins. We were very happy to report just under 65%, and I think we can think about the same for Q4. And that really sets us up for the 67% to 70% next year. We do have a lot of programs going. We announced recently that we've stood up another third-party manufacturing plant in China. And so we're working our first 2 lines there to get sellable product. And so we've got a lot of things happening inside of that gross margin number, but they're all designed to get us setup so that we can significantly increase capacity on a short-term basis if we need to. And at the same time, we're ramping up the U.S. So I think we're squarely in that 67% to 70% range for next year. Depending on the volume and depending on how fast we ramp, we could be at the low end, but we could just as easily be at the high end. And so I think from a modeling standpoint, gross margin is just right in that 67% to 70% range. From a mix standpoint, we'll continue to see the mix benefit in the U.S. from the pharmacy channel. We're not done moving customers from the DME and direct side of the business into the pharmacy and ramping up DASH. The one thing that's still a question mark for us there is what we'll be pricing Omnipod 5 at and whether we'll have a premium price or price parity there. So there's a few open questions, Dave, that we'll look to clarify when we get to our earnings -- or, pardon me, our guidance in our Q4 call. -------------------------------------------------------------------------------- David Ryan Lewis, Morgan Stanley, Research Division - MD [22] -------------------------------------------------------------------------------- Okay. Super helpful. Just one more [nitpick] for you and then a quick one for Shacey. So Wayde, the third quarter momentum slowdown in the U.S., I'm sort of assuming, because you guided to momentum just to build in the fourth quarter, that just reflects probably the peak COVID new patient start impact in the third quarter, and there's kind of no change in underlying U.S. fundamentals. And then just for Shacey, as I think about Omnipod 5 next year and some of the different things you've talked about these last couple of calls, you always talk about MDI. You've talked about type 1 as well. As you think about the impact of Omni 5 in the market next year, is it much more about, for you, type 1 conversions, type 1 share, which has not been necessarily a significant driver of the business? Or do you think it actually accelerates the MDI conversion part of the business? I'm just kind of curious which is the most -- or the more underappreciated opportunity between the 2? -------------------------------------------------------------------------------- Wayde D. McMillan, Insulet Corporation - Executive VP,CFO & Treasurer [23] -------------------------------------------------------------------------------- Sure. Yes. So I can start that on the sequential growth that you mentioned, David. And you're right, you can see it in our growth rates. Q2 is the problem quarter. I mean that was a quarter where we had significantly lower new customer starts. So we're going to live with that for 4 quarters. And that's the big one that we'll annualize out of the business in Q1 next year and adding new customer starts from Q2 into 3 and 4. So I think 4 obviously has 3 quarters of compounded impact to it, and that's factored into our guidance. But that's why I wanted to just share and give perspective on all the momentum we have building inside the business because there's so much good things happening. And really, our goal here is to come out of the other side of the pandemic with as much momentum as we can around our new product innovations, around our business model strategies with type 2 and the pharmacy as well as the investments we've made in the sales force and the commercial business and including virtual training as well as, as Shacey mentioned, the end-to-end customer process. And so there's just so many good things that this compounding new customer starts is offsetting for us. And so it's really our job to build the momentum here, come out the other side stronger. Is Q4 going to be the trough? I don't know yet. We have to see what the pandemic impact is in Q4 and then what Q1 looks like. But we really don't annualize out that tough Q2 until we get to Q1 next year. -------------------------------------------------------------------------------- Shacey Petrovic, Insulet Corporation - President, CEO & Director [24] -------------------------------------------------------------------------------- And David, on your question on Omnipod 5, I think it's a great question and one we're looking forward to sort of seeing the answer in 2021. I guess I get most excited about the MDI users that are converting because if you think about what's happening today, nobody chooses -- at least, our data would indicate that nobody chooses a tubed pump because it has tubes. They choose it over Omnipod when they do because it has Dexcom integration. And so when we check that box -- and we obviously believe Omnipod 5 will be significantly differentiated, significantly easier to use. And we think about key features like phone control, like constant access to data and all the other things that I've spoken about. When we check that box, we should get a much larger -- already today, we get a very large percent of MDI conversions. We should get a much larger one. So that, to me, is probably the biggest opportunity because if you think about the capital equipment model, some of those folks -- most of those folks are locked into a 4-year contract, and so 25% of them will come up. And I think it will be interesting to see in that population what happens in terms of adoption from Omnipod 5. But that's an area where we're a little less familiar with because we get less patients from that area today. What we know for sure is that MDI users are going to be very, very attracted to Omnipod 5, and when we check the box of integration and automation with Dexcom, that's going to be a very differentiated and appealing product. -------------------------------------------------------------------------------- Operator [25] -------------------------------------------------------------------------------- I show our next question comes from the line of Larry Biegelsen from Wells Fargo. -------------------------------------------------------------------------------- Lawrence H. Biegelsen, Wells Fargo Securities, LLC, Research Division - Senior Medical Device Equity Research Analyst [26] -------------------------------------------------------------------------------- One on international, one on, of course, Omnipod 5. So in the past, I think you guys have talked about international growth being in the high teens, low 20% range. Is that still intact? Which new markets are you planning to launch it in 2021? I heard 5 new markets in the prepared remarks. And how far behind is Omnipod 5 outside the U.S. compared to the U.S.? And I had one follow-up. -------------------------------------------------------------------------------- Shacey Petrovic, Insulet Corporation - President, CEO & Director [27] -------------------------------------------------------------------------------- Great. Maybe I'll ask Wayde to give a little bit of insight into the overall expectations for international growth, but there's nothing fundamental in the business that would change our long-term expectations for that business. It's just simply that we're in the midst of a pandemic and that there's been a slower recovery in particularly Europe than other parts of the world and, particularly, the United States. So we remain very bullish on our expansion strategy over the long term. And it's why I mentioned in my remarks that we're really starting in earnest our expansion in early 2021. And over time, this adds significant addressable market to us over the coming years. We didn't give the 5 markets. So we'll lay those out for you as we enter into them. We did get one checked off the box this quarter in Belgium, so actually 1 of the 5 we just entered. And we will let you know as we enter these markets that those launches have occurred. And then -- sorry, you had also asked, Larry, about Omnipod 5 in international. We haven't given a time line on that yet. Just to let everybody know, that work is underway, and we are fully committed to bringing Omnipod 5 to our European markets and to all of our international markets. -------------------------------------------------------------------------------- Lawrence H. Biegelsen, Wells Fargo Securities, LLC, Research Division - Senior Medical Device Equity Research Analyst [28] -------------------------------------------------------------------------------- And on Omnipod 5, do you guys typically announce when you have filed or submitted something like that? And is there any reason why the pivotal Omnipod 5 data would look much different from the prepivotal data we saw at ADA this year, for example, a larger number of centers? Anything that we should be aware of that would make that data, the pivotal data, look meaningfully different from the prepivotal data that we should be aware of? -------------------------------------------------------------------------------- Shacey Petrovic, Insulet Corporation - President, CEO & Director [29] -------------------------------------------------------------------------------- Sure. Thanks, Larry. And we don't -- our practice is not to notify or become public when we submit. We simply share the news when we're cleared. So that's our general practice. In terms of the data, I really don't have much insight to offer there. We don't want to preview it. Obviously, the prepivotal data looked very, very strong, and we are very excited to get the Omnipod pivotal data out there, but I don't want to give insight into just how it compares at this point. -------------------------------------------------------------------------------- Operator [30] -------------------------------------------------------------------------------- Our next question comes from the line of Jeff Johnson from Baird. -------------------------------------------------------------------------------- Jeffrey D. Johnson, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [31] -------------------------------------------------------------------------------- Maybe just a couple of clarifying questions. Wayde, you mentioned Omnipod 5 pricing and thoughts on a premium potentially for next year. I thought that was kind of settled at this point that you probably were going to go after access more than pricing just to try to get it out there faster and more broadly across [accounts in that]. So just is there being -- is there a reconsideration happening that maybe you could get a premium for O5 or how to think about that? -------------------------------------------------------------------------------- Wayde D. McMillan, Insulet Corporation - Executive VP,CFO & Treasurer [32] -------------------------------------------------------------------------------- Yes. It's still a question for us, Jeff. There there's a lot of different opportunities for us across the U.S. in particular. But like you said, a major consideration for us is getting us out to our customers as fast as possible. And we certainly take into consideration the current environment that we're in, other AID systems that are in the marketplace. And we also know that there is a significant opportunity for us to get there faster. Having said that, even if we go at parity pricing, there's a long process to work through. And we've put the infrastructure in place. We've built up our access teams. We built up our wholesalers and distributors, and we've learned a lot through the ramp of DASH. And so it really is still a question for us, Jeff. It really just depends on how we want to approach the market. Lots of benefits, obviously, to pricing it at a premium, but there are just as many benefits and a very compelling one from a customer standpoint to get it into the hands of our current customers and new customers. So yes, that one's still a jump ball for us. -------------------------------------------------------------------------------- Jeffrey D. Johnson, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [33] -------------------------------------------------------------------------------- Okay. Great. And just maybe the follow-up then is, this cumulative math that we talk to a lot of investors about, and it seems to confuse them at times and the way you guide to new patient starts relative to your pre-COVID expectations. When I put all that in the blender, it does seem to create maybe a little confusion. Very simplistically, in the 3Q, when I take kind of all the data points you're providing, it seems to me your new patient starts in the U.S. were probably close to on par with what they were last year in the 3Q, which was a pretty good quarter. Obviously, 4Q '19 was even stronger. But 3Q '19, it seems like your U.S. new patient starts is almost at parity with last year. And on an absolute basis, OUS may be down marginally, 5% or 10% year-over-year, but not dramatically down. Is that the fair way to be thinking about what they were on an absolute basis in the quarter itself? -------------------------------------------------------------------------------- Wayde D. McMillan, Insulet Corporation - Executive VP,CFO & Treasurer [34] -------------------------------------------------------------------------------- Yes. And you're right. It is challenging. And I'll just highlight again, this is one of the reasons why we wanted to provide guidance. So give us an opportunity to share more about it and to provide enough data points. And it sounds like, Jeff, you're close. What I would say is the U.S. was a little stronger headwind than you laid out there, but Q4 is going to be getting pretty close against a really tough comp in Q4. The U.S. business has been performing really well. And despite the headwind, it's been on the low end of our stated new customer starts headwind. And then internationally, a little higher again than the estimates you put out there, those are a little lower than we're experiencing from our estimates. And we do expect international to persist more into Q4. -------------------------------------------------------------------------------- Operator [35] -------------------------------------------------------------------------------- Our next question comes from the line of Joanne Wuensch from Citibank. -------------------------------------------------------------------------------- Joanne Karen Wuensch, Citigroup Inc. Exchange Research - Research Analyst [36] -------------------------------------------------------------------------------- I just put them all up front. What is the size of the 2- to 6-year-old population that you are looking to go after with that incremental study? And then I'm trying to get my head around how Omnipod 5 ramps next year. We've heard limited launch. We've heard full launch, but you've got a very successful DASH product that's already out there. And so I'm trying to just -- if you could walk us through any milestones or mileposts we should think about. -------------------------------------------------------------------------------- Shacey Petrovic, Insulet Corporation - President, CEO & Director [37] -------------------------------------------------------------------------------- Sure, Joanne, I don't have the total population of 2- to 6-year olds in the market. It's obviously a really important population for us, not necessarily because of the size of the population but because we know that when people adopt Omnipod, they stay with us. So we've always been strategically focused on the young pediatric population. And it's also a population where Omnipod is heavily, heavily differentiated for a variety of reasons. It's just a much easier technology to use on young active children. So we're excited about getting everybody enrolled in our clinical trial and getting that label expansion ideally before the end of next year. In terms of milestones for Omnipod 5, we -- there is a tremendous amount of activity going on in the company as we think about ramping towards the Omnipod launch. We have obviously the clinical data analysis and presentation and publication of the data. So that will be a milestone as we move forward. We have IT and commercial work going on to look at establishing our easy onboarding systems for Omnipod 5. We have market access work. So obviously, we will start to build reimbursement in the pharmacy channel for Omnipod 5. And then we have a ton of work going on in medical affairs, et cetera. And then, of course, we have a cross-functional team working on the submission, which is going to be somewhere around 30,000 to 40,000 pages. So every -- almost every individual function in the company is touching the Omnipod 5 launch in some way. And so lots of milestones happening internally in terms of our commercial progress, our manufacturing progress and our clinical progress. The next thing that we'll really announce is probably the data and then the clearance of the system. And so that's -- those are the things to look for kind of publicly, externally. And you mentioned, is it a limited market release? Is it a full market release? We've always maintained that we will do a limited market release. It's a high-stakes product for us. We know it's the most anticipated innovation in the pipeline of all diabetes products, and so we want to get it right, and a limited market release is part of doing that. So when we launch in the first half of 2021, we will launch into a limited market release. How long that will be, I think, remains to be seen because it depends upon when we're meeting our endpoints and our objectives for a limited market release. And that will be based on market access, manufacturing ramp and customer feedback. -------------------------------------------------------------------------------- Operator [38] -------------------------------------------------------------------------------- Our next question comes from the line of Ryan Blicker from Cowen. -------------------------------------------------------------------------------- Ryan Blicker, Cowen and Company, LLC, Research Division - VP of Healthcare [39] -------------------------------------------------------------------------------- Maybe starting with the pharmacy channel transition. You noted greater than 30% of U.S. volume is going through the pharmacy, which is similar to last quarter. 65% of new U.S. [as to] the pharmacy, so the long-term outlook remains clear. But can you provide any additional color on why the pace of quarterly increases for total U.S. volume through the pharmacy has slowed a bit over the past couple of quarters? And then looking to 2021, do you believe the Omnipod 5 launch will be a catalyst to convert a large portion of your existing installed base to the pharmacy? -------------------------------------------------------------------------------- Shacey Petrovic, Insulet Corporation - President, CEO & Director [40] -------------------------------------------------------------------------------- Thanks, Ryan. And maybe I'll let Wayde talk about the specific numbers in terms of the pharmacy channel. But I would say that momentum is very strong in the pharmacy channel. Access continues to increase. And we do expect that Omnipod 5 should be a catalyst in terms of pharmacy conversions because it really is going to be a pharmacy product. And so that, we are committed to the pay as you go model, and we know there's a lot of demand building for the technology. -------------------------------------------------------------------------------- Wayde D. McMillan, Insulet Corporation - Executive VP,CFO & Treasurer [41] -------------------------------------------------------------------------------- Yes, Ryan, you're correct. Our guidance is at greater than 30%. And just to clarify, it is growing a couple of percentage points in our numbers. We just are keeping it rounded. So as the quarters go, quarter-to-quarter, we're probably not going to see major step-ups just given that our overall business grows as well. But as Shacey said, the majority of our new customer starts are on DASH, and DASH is primarily in the pharmacy. So we will continue to see the pharmacy volume grow over time. -------------------------------------------------------------------------------- Ryan Blicker, Cowen and Company, LLC, Research Division - VP of Healthcare [42] -------------------------------------------------------------------------------- That's great. And then if I could ask a 2-part follow-up on the type 2 opportunity. So you talked again about ramping CGM penetration in the type 2 patient population, which clearly bodes well for pump penetration over time. Just wondering, thus far in 2020, have you seen any evidence of pump penetration increasing among that type 2 patient population? Or do you believe the increase in your type 2 mix is being more driven by share gains of new patients? And then, acknowledging it's really early, I'd be curious to know the patient mix of leads generated by your DTC program and whether or not it's driving a disproportionate level of interest among type 2s. -------------------------------------------------------------------------------- Shacey Petrovic, Insulet Corporation - President, CEO & Director [43] -------------------------------------------------------------------------------- Thanks, Ryan. Yes. So in terms of overall pump utilization in type 2s, it's still pretty low penetration, and there's just a massive opportunity to go get with type 2s. We see CGM as sort of a beachhead, right? As CGM adoption happens, which is happening -- is very maturely happening in type 1 but just really getting going in type 2, we see that as a trend that then, as you said, bodes well for pump adoption. Other pumps are challenged from an access perspective. So we are very fortunate to be in the pharmacy channel providing the pay as you go model. Those -- that's really what's driving access and availability of Omnipod to the type 2 population. So we know we've got a really appealing product. We know that the technology adoption curve for CGM is helping to drive this. But we are in a unique position in terms of our channel and in terms of our form factor and Omnipod's discretion and ease of use to be able to win in that market. And so I think we are winning -- I know we're winning primarily with MDI conversions, not other pumps. And I would be surprised if other pumps are seeing the level of conversion that we're seeing in type 2s. And we're testing a bunch of different messages in DTC. So we do have actually messaging that is geared towards the type 2 population. Too early at this point to be able to give color on that, but as I said, as we lay out our expectations for 2021, we'll be able to give insight into DTC and what we expect that, that's going to drive for us. -------------------------------------------------------------------------------- Operator [44] -------------------------------------------------------------------------------- I show our next question comes from the line of Travis Steed from Bank of America. -------------------------------------------------------------------------------- Travis Lee Steed, BofA Merrill Lynch, Research Division - VP [45] -------------------------------------------------------------------------------- Just on the [separate] type 2 study that you began recruitment for recently. What do you hope to gains from that? [I mean, do you just] need that for the FDA label or reimbursement coverage? (inaudible) Omnipod approval. -------------------------------------------------------------------------------- Wayde D. McMillan, Insulet Corporation - Executive VP,CFO & Treasurer [46] -------------------------------------------------------------------------------- Might have to just ask him to... -------------------------------------------------------------------------------- Shacey Petrovic, Insulet Corporation - President, CEO & Director [47] -------------------------------------------------------------------------------- Yes. Travis, I'm sorry. You broke up there, so we didn't fully -- you were a little garbled. There was some interference. If you could repeat your question, that would be great. -------------------------------------------------------------------------------- Travis Lee Steed, BofA Merrill Lynch, Research Division - VP [48] -------------------------------------------------------------------------------- Yes, sorry about that. The question was on the Omnipod 5 type 2 feasibility study and what you hope to gain from that, if you need that for FDA approval for reimbursement coverage. -------------------------------------------------------------------------------- Shacey Petrovic, Insulet Corporation - President, CEO & Director [49] -------------------------------------------------------------------------------- Got it. Okay. Great. Omnipod 5 type 2 feasibility study. So that is the first step in terms of our clinical exploration for type 2s on Omnipod 5. So you may remember, we did feasibility studies for type 1 with Omnipod 5 as well. This really is a step in the eventual label expansion. And it's an early step. So we will get 30 to 40 users on the product. We will look to see does the algorithm perform as we would expect it to for the segment. Or do we need to tweak the algorithm? Remember, when we did our early feasibility studies with Omnipod 5 in the type 1 population, we did a lot of work on the algorithm, a tremendous amount of work on the algorithm to deliver the performance that we saw in the pre pivotals. Remember, we had best-in-class hypoglycemia. We had great time in range particularly with kids. That came from just a lot of tweaking of the algorithm. And so we may need to do the same thing in the type 2 population that remains to be seen. So this feasibility study will give us those learnings. It will then map out for us how much clinical work do we have. And then we'll be able to determine what's the path for label expansion. In terms of reimbursement, we're fortunate, in the pharmacy channel, there really isn't a distinction between the type 1 and type 2 user. And so with label expansion, that should pave the way for access in the pharmacy channel for type 2. -------------------------------------------------------------------------------- Travis Lee Steed, BofA Merrill Lynch, Research Division - VP [50] -------------------------------------------------------------------------------- Okay. That's great. And one quick question on -- as you look through like the early October or the last few weeks as cases have spiked in certain geographies, is there anything to call out that's different in those geographies? Just kind of curious how well prepared the doctor's offices and patients are now versus how they were earlier this year. -------------------------------------------------------------------------------- Shacey Petrovic, Insulet Corporation - President, CEO & Director [51] -------------------------------------------------------------------------------- Yes. Yes, I think it's a good point, and we mentioned, in the U.S., everything is getting more efficient and more effective working in this environment. So of course, we've talked a lot about the virtual tools for training and support that we've rolled out. We really have built a lot of confidence and preference among our clinicians and our patients for that pathway of training. And so even as certain areas experience more challenges with the pandemic. We're able to continue to bring new patients onto the product. And so in the U.S., as Wayde said, we're feeling pretty good, right? The high end of our guidance in Q4 would indicate that we're going to be at a record quarter in Q4. So that's great. Outside of the U.S., it's a more fragmented and more challenged environment right now. And we still see that our virtual tools and the capabilities that we've built are certainly helping ensure that we can continue to bring patients on. But as we have the U.K. heading back into shelter in place, France, those are a little bit more challenged environments for us. And France, in particular, is a large market for us. It's not like it was in Q2. We certainly still see progression in terms of improved new patient starts outside of the U.S. and even in these more challenged markets, but there definitely is a headwind there that doesn't exist in the United States. -------------------------------------------------------------------------------- Operator [52] -------------------------------------------------------------------------------- I show our last question comes from the line of Raj Denhoy from Jefferies. -------------------------------------------------------------------------------- Briana Michele Warschun, Jefferies LLC, Research Division - Equity Associate [53] -------------------------------------------------------------------------------- This is Briana on for Raj. I was hoping you could provide some detail on the mix of COGS running through the Acton plant versus sources from Flex in China. And then how does the new manufacturing contract in China play into that mix? And then just a quick follow-up on that would be, what is the gross margin upside potential as more manufacturing shifts in-house? And is a shift in automated manufacturing in the U.S. a key driver to the high end of your long-term gross margin target of 70%? Or are there other things going into that 70%? -------------------------------------------------------------------------------- Wayde D. McMillan, Insulet Corporation - Executive VP,CFO & Treasurer [54] -------------------------------------------------------------------------------- Briana, yes, you've actually touched on a couple of key drivers there. So the question was around mix on COGS. And the key for us today is Acton manufacturing is a more expensive product because it's fairly low volumes on 2 lines in a plant that's designed for 4 automated lines. And a lot of the cost is fixed on the automated manufacturing lines. So today, our production out of our Flex China facility is a lower cost than Acton. However, over time, it's designed that the automated manufacturing lines will be more efficient and get us a lower-cost product. And that is, as you mentioned, the single-largest driver of improved gross margins for us over time. But in combination with that is scale. I think we are building significant critical mass in the business here as we accumulate more and more customers with our patch pump disposable design. And the investments that we've been making in manufacturing, both in the U.S. and in China, really build a critical mass of expertise and know-how in how to do this. And as we scale and bring more volumes into it, those volumes help us drive gross margins significantly as well. And the new third-party manufacturer in China is not an impact on our gross margins today. We've just got those 2 lines up and running and producing, not producing sellable product yet, but we do have them producing product. And so those will start to factor into our COGS either later this year or in early 2021. -------------------------------------------------------------------------------- Operator [55] -------------------------------------------------------------------------------- I'm showing no further questions at this time. I would now like to turn the conference back to Shacey Petrovic. -------------------------------------------------------------------------------- Shacey Petrovic, Insulet Corporation - President, CEO & Director [56] -------------------------------------------------------------------------------- Thank you. In closing, I would like to acknowledge both National Diabetes Awareness Month and Insulet's 20th anniversary since our company's founding. We've spent the last 20 years with a clear mission: improve the lives of people with diabetes. And over that time, we've brought advanced innovation to the diabetes community and helped people spend more time living their best life and less time managing their chronic condition. So we're very proud of all we've done, and we're really excited about our innovations to come as we deliver on our mission. Thanks all, and have a great evening. -------------------------------------------------------------------------------- Operator [57] -------------------------------------------------------------------------------- Ladies and gentlemen, this concludes today's conference call. Thank you for your participation, and have a wonderful day. You may all disconnect.