PODD - NASDAQ

Good afternoon, ladies and gentlemen, and welcome to the Insulet Corporation Second 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. [Operator Instructions] As a reminder, this conference call is being recorded. And I would now like to turn the conference over to your host, Deborah Gordon, Vice President, Investor Relations.

Good afternoon, and thank you for joining us for Insulet's second quarter 2024 earnings call. With me today are Jim Hollingshead, President and Chief Executive Officer; and Ana Maria Chadwick, Chief Financial Officer and Treasurer. Both a replay of this call and the press release discussing our second 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.

Thanks Deb. Good afternoon and thank you for joining us. 2024 is shaping up to be another year of rapid growth, fueled by strong demand for Omnipod 5 and our accelerating pace of product innovation. Our financial results in Q2 demonstrate our strong execution and significant momentum across all of our markets, both in the U.S. and internationally, and we remain the clear industry leader in automated insulin delivery. The Insulet team is executing at a high level and with increasing velocity, delivering strong financial performance and advancing our strategic initiatives. These first half results reinforce our confidence in an even stronger second half, and another year of robust revenue growth and margin expansion as we continue to deliver on our mission to simplify and improve the lives of people with diabetes. Second quarter revenue exceeded our expectations across the board. In light of first half results and continued strong momentum, we increased full year guidance for revenue, gross margin, and operating margin. On today's call, I'll update you on three things; our Q2 results and the continuing strength of our competitive position in the market; execution against our 2024 objectives to expand the Omnipod 5 platform globally, and lastly, our ongoing success capturing the value of scale across our business. Starting with financial performance. In Q2, we achieved total Omnipod revenue growth of 26%, including U.S. growth of 27% and international growth of 24%. Omnipod 5 continues to disrupt the diabetes technology landscape. In the U.S., we maintained a strong momentum in new customer starts, achieving sequential growth in Q2, line with our expectations. Our strategy is to drive market expansion through our focus on bringing people out of multiple daily injections onto Omnipod therapy. As a result of that focus, we continue to rapidly increase our customer base, while remaining at the forefront of driving overall market expansion. Our growth in the quarter was driven by increasing new customer starts from MDI users in both Type 1 and Type 2 diabetes. At a market level, we are seeing an emerging dynamic in which customers who have adopted pump technology are switching manufacturers at a lower rate. As a result of that dynamic and our continuing market leadership in MDI, our new customer starts from competitive switches have become a smaller part of our business. However, we continue to be the net winner in competitive switching, winning more customers than we lose. During the quarter, roughly 85% of our US new customer starts came from people previously using MDI, consistent with the prior quarter, and we continue to take share from our competitors. Across both the Type 1 and Type 2 populations, we benefit from our competitive advantage in the pharmacy channel. The scale and scope we have built in this channel has significantly increased access and simplicity, which in turn helped to drive strong new customer starts and maintain very high customer retention. We're also working hard to continue to increase awareness among prescribers and this work is paying off. A growing number of health care practitioners are writing scripts for Omnipod within both the endocrinologists and primary care physician channels. Insulet is the clear leader in Type 1 and our Omnipod platform also remains the clear choice for people with Type 2. We are excited about the huge opportunity for us in Type 2, subject to FDA clearance for Omnipod 5 label expansion, which we hope to receive this year. I will provide more detail in a few moments. Omnipod 5 wins everywhere it goes. In Q2, we were pleased to again deliver international revenue and new customer starts growth ahead of our expectations. As a result of this success, we are significantly raising our international revenue outlook, this time by 600 basis points. We're rapidly approaching $0.5 billion in annual international revenue for 2024, and we're still in the early innings. The accelerated revenue we are achieving returns us to growth rates above 20% at the high end of our international outlook. We've been able to achieve these results with only 2 full country launches and two more just getting started, which signals to us significant runway for continued international growth as we expand access to Omnipod 5 in all of the markets we serve. Earlier this year, we promised that in 2024, we would deliver a cascade of innovation. And in Q2, we continued to do just that, launching multiple platform expansions. Following our successful US limited market release, we entered full release of Omnipod 5 with Dexcom's G7 in the last 2 weeks of the quarter. Full integration with both G6 and G7 allows us to offer even more choice for our customers and capture the growth and adoption of Dexcom's latest sensor. As a reminder, Omnipod 5 with G7 is now exclusively available through several specialty pharmacies. This has allowed us to deliver an outstanding customer experience and ensure that new customers receive their Omnipod 5 G7 starter packs and Pod seamlessly. Demand for our G7 offering is strong. Early results are promising and in line with our expectations. We have been pleased with the performance of this channel. It is operating at scale, and we can flex to meet ongoing increases in demand. And it allows us to focus our inventory on new customers in the near-term, which we continue to expect will provide us with a tailwind in new customer starts during the second half of the year. Last week, we provided our existing Omnipod 5 customers, a free over-the-air software update, enabling their controllers and compatible smartphones to pair with G7. Existing customers will be able to move to G7 once they see compatible Pods appear in their preferred retail pharmacy. Given the success of our specialty pharmacy launch, we recently made the decision to allow the inventory shift in retail outlets to progress at a more natural pace. This will allow us to minimize any potential confusion for our customers, and our channel partners, while also minimizing the risk of potential product returns and potential impact on our gross margins. We continue to expect the ease of resell pharmacy as usual, will provide an additional new customer starts tailwind as G7 Pods naturally become more widely available, now planned later in Q3. During Q2, we achieved another major milestone with the initial US launch of the Omnipod 5 iOS app with G6, and our limited market release is progressing very well. We are hearing from early users just how Pod liberating the system is. One Podder og shared that "Omnipod 5, with the iPhone is the biggest innovation since the introduction of AID – it's a delightful experience having everything on one device." We also had a Podder tell us "Omnipod 5, that's managing diabetes in the background ." It is gratifying to hear this feedback and it gives us even more confidence in our ability to continue scaling our limited release and then transition to full release in the fall. Adding to this cascade of innovation in the US, we are pleased to announce that we expect to launch Omnipod 5 integrated with Abbott's Freestyle Libre 2 Plus sensor by the end of this year. We are excited to expand our Omnipod 5 offering to reach customers in the US, who have chosen the Libre family of sensors, and we are confident this portfolio expansion will generate increased demand for Omnipod 5, just as we are seeing in the early days of our launches with Libre 2 Plus internationally. Turning to international. In Q2, we extended the Omnipod 5 platform into new markets and we were the first to offer integration with Abbott's Libre 2 Plus sensor internationally, introducing this integrated offering in the UK and Netherlands. This also marked our first sensor of choice Pod offering, which is compatible with both Libre 2 Plus and G6. We are hearing from ACPs and patients that both integrations are providing an outstanding experience, including how easy it is to start Omnipod 5 using either leading sensor. Further expanding global reach, we recently launched Omnipod 5 in France, which is one of our largest markets. We are in the early days and feedback from patients and HCPs has been fantastic. HCPs have noted the very positive clinical outcomes with particular emphasis on Omnipod 5's simplicity. Demand for Omnipod has always been high in France. And with Omnipod 5, we expect to continue to build on this strength and successfully drive robust adoption as we have seen in our other international launch markets. Omnipod 5 is now available to the majority of our European customers. And of course, we are not stopping there. We are in the final planning stages for additional launches in Italy, the Nordics, Canada, Australia, Switzerland and Belgium, with others soon to follow. For all of the countries in our near-term pipeline, you will see us begin local market work to prepare for our planned commercial launches throughout 2025. We will keep you updated on our progress, capitalizing on the enormous international opportunity we are pursuing. Turning to type 2 diabetes, which represents another significant opportunity for growth in our business. We are already the market leader in our space. In the second quarter, people with type 2 represented roughly 25% of our US new customer starts, continuing a strong ongoing trend. The type 2 insulin delivery market is large and significantly underpenetrated. The combined patient population using either intensive insulin therapy or basal insulin is roughly three times the size of the type 1 population. This year, we have had two important pathways for innovation in the type 2 space, both commercial and clinical. As you know, we have been commercially piloting Omnipod GO, a product aimed at the needs of basal-only insulin users. The purpose of that pilot has been to accomplish two main goals: one, determine the optimal way to expand our sales force; and two, develop a better understanding of the patient profile that presents in nonspecialist practices so we can better serve patient needs. This pilot has led to our identifying multiple patient profiles and designing our go-to-market strategy. In parallel, we have been pursuing clinical work to expand our offerings for people with type 2 diabetes, most meaningfully with our pivotal trial with Omnipod 5 called SECURE-T2D. We recently presented the trial data at ADA, and I want to take a moment to summarize some of the key top line results. SECURE-T2D is the largest study ever completed for the use of automated insulin delivery in type 2 diabetes, with approximately 300 people completing the protocol. The study participants were highly diverse and representative of the general population in the US. This is important both from the point of view of HealthEquity and because the study results will be clinically relevant to patients as they present in the real world. The clinical outcomes were striking. Omnipod 5 delivered an average A1c reduction of 0.8 with increasing benefit across the study population as baseline A1cs were higher. Those with the baseline A1c greater than 9 on average achieved an A1c reduction of 2.1. More than half of the participants were concurrently on GLP-1 therapy. And notably, results were the same across all cohorts, whether or not on a GLP-1. Importantly, roughly 20% of study participants were currently on basal-only insulin injections, and they also benefited in line with intensive insulin users. In this population, a key barrier to insulin adoption is the risk of hypoglycemia. And in SECURE-T2D, there was no increase in hypoglycemia. Finally, among several other demonstrated benefits, study participants reported a clinically valid and meaningful reduction in diabetes distress. These remarkable results clearly demonstrate Omnipod 5's benefit for people with type 2 diabetes. On the basis of these results, in June, we filed for expansion of our indications use for Omnipod 5 with the FDA. Now that we have such strong results from our clinical trial work and the rich learnings from our Omnipod GO commercial pilot, these two innovation streams will come together. In anticipation of FDA clearance of our label expansion, during the coming quarters, we will make targeted investments in our sales force to extend our currently successful sales model and expand our feet on the street to further penetrate the Omnipod 5 prescribing base, and we will focus our efforts on Omnipod 5. We strongly believe Omnipod 5 will provide benefit to a wide range of insulin using type 2 patients, both those MDI and those on basal-only insane therapy. Therefore, Omnipod 5 will replace Omnipod GO as our offering for people with type 2 diabetes on basal-only insulin. We are grateful for the patients and the HCPs that participated in our pilot and we look forward to supporting them in their transition to other Omnipod therapies. Leading with Omnicon 5 in this space will enable us to serve more customers by leveraging and streamlining existing operations, supply chain and manufacturing, and it eliminates the need for ongoing investments in product life cycle management for a separate product platform. More importantly, we are confident we have a clear right to win in the type 2 space. We expect to be the first to market in type 2 with an AID offering, and not just any AID offering, but with Omnipod 5, which is the product platform that quickly leapfrogged into market leadership once we launched it in type 1. Omnipod 5 will bring all the benefits to type 2 patients that it already delivers, ease of access to the pharmacy channel, low to no upfront cost, market-leading ease of use and the unique discretion and convenience of a wearable, disposable patch pump with the day-to-day simplicity of full phone control with both Android and iOS. All of that, while delivering the striking clinical benefits we have just established with our pivotal trial. We are excited to bring the best automated insulin delivery offer to the type 2 market by the end of this year, pending clearance by the FDA. Ana will have more detail on the financial impact of our refined strategy in a few moments, but the biggest financial impact will be the opening of a new addressable market for us which we fully expect will fuel our growth. Before I hand over to Ana, I'd like to briefly discuss our expanded global manufacturing capabilities. We've been successfully investing in process innovation in our Insulet facility, which is meaningfully contributing to gross margin expansion. And we have made significant investment in the new state-of-the-art manufacturing plant in Malaysia, which will enable us to scale faster and expand margins and cash flow. We are thrilled to have begun producing sellable Omnipod 5 product in Q2 in Malaysia ahead of schedule. Our new facility is over two times the size of our US facility, and we expect it to be accretive to gross margin in its first full year of production, ramping as volumes increase. Our advantages and scale position us to grow our global business profitably and seamlessly meet the growing demand for Omnipod 5, which represents an important and distinct advantage over competitors. Shortly after this call, several members of our executive team will travel to Malaysia to attend our facilities official grand opening. We look forward to celebrating this occasion with our local team as well as the many other Insulet employees globally who helped to make this happen. With that, I'll turn the call over to Ana to walk you through our results and guidance.

Thank you, Jim, and good afternoon, everyone. We have significant momentum throughout our global business and elivered another strong quarter of financial results strategic execution. Most importantly, our global team continues to advance our mission to simplify and improve the lives of people with diabetes. Second quarter results exceeded our expectations. We achieved 23% revenue growth, driven by total Omnipod growth of 26%. Our estimated global retention remained stable. The foreign currency impact on total company revenue on a reported basis was approximately 80 basis points favorable versus our reported guidance. US Omnipod revenue growth was 27%, finishing above the high end of our guidance range. Omnipod 5 integrated with G6 is the primary driver of our strong growth, while our integration with G7 is gaining momentum. We are excited to have launched our US full market release with G7 in June, and we will continue to face into our channel partners over the coming months. I will speak more to this dynamic in a few moments. Our year-over-year US revenue growth was primarily driven by our success expanding our customer base and increasing volume throughout the pharmacy channel, including premium Omnipod. This was partially offset by an estimated $10 million reduction of inventory in the channel as we manage the Omnipod 5 G6 to G7 transition, which was in line with our expectations. US utilization trends were slightly lower than prior year as a result of Omnipod 5's significant ramp in the first full year of launch in 2023. As it relates to our US revenue expectations, we estimate approximately half of our beat versus the high end guidance was due to our strong commercial execution. The other half was due to pricing benefits from channel mix as well as fewer G6 pod returns than anticipated. Our underlying growth is strong. We have significant momentum, and we are thrilled to have expanded our product offering and provide greater choice for our customers. With our lead position in the market and the many catalysts for us this year, we are in a great position to continue to deliver robust revenue and customer base growth in 2024 and well beyond. Turning to international. We achieved international Omnipod revenue growth of 24%. These results were once again well above our expectations. While Omnipod DASH is doing very internationally and remains a sizable percentage of our overall international volume, Omnipod 5's demand is very high and fueling our growth. Last year's launch in the UK and Germany are driving both revenue and new customer start growth. Although early, the increased demand we're seeing in France as a result of our recent Omnipod 5 launch is very encouraging. Together with our with our rollout of Omnipod 5 Libre 2+ in two of markets around the start of 2Q, we are well positioned for continued growth. International utilization trends were slightly higher than in prior year due to higher initial Omnipod 5 orders, similar to what we saw last year in the US, but to a smaller degree. On a reported basis, foreign currency was 90 basis points headwind over the prior year and approximately 110 basis points favorable versus our guide. Drug delivery revenue was $8 million, which was above our guidance range, partially due to an increase in orders from our partner and timing of production. Gross margin was 67.7%, up 90 basis points, primarily driven by pricing benefits in both the US pharmacy channel and our international markets, as well as ongoing manufacturing efficiencies. Partially offsetting this growth was a onetime charge of $13.5 million, or 280 basis points relating to components that are not expected to be utilized. This charge resulted from our strategic decision to go market with Omnipod 5 instead of Omnipod GO to drive accelerated growth in type 2 pending FDA clearance. Even with this charge, our execution throughout our global business is resulting in significant margin expansion, which strengthens our confidence in our margin trajectory over the long-term as we continue to execute and scale efficiently. While operating expenses increased in the quarter as we invest in our business, including to support the cascade of innovations we've had this year and those to come, our level of spend was lower than we expected due to a timing shift into the second half of the year. In order to drive the above-market growth we have been delivering, we will continue to invest in our business. At the same time, we are achieving margin expansion resulting from our revenue performance, gross margin improvements and the operational leverage we are realizing throughout our business. Operating margin was 11.2% and adjusted EBITDA was 18.6% of revenue, both exceeding our expectations, primarily due to our revenue outperformance and the shift in timing of spend. Expansion of these metrics was partially offset by the onetime charge of $13.5 million or 280 basis points related to Omnipod GO. Last quarter, we provided color that due to our positive earnings trend, we may find at some point in the year that the valuation allowance we had against our deferred tax assets may no longer be required. In Q2, we reached this conclusion, and therefore, we released the majority of our valuation allowance, resulting in a non-cash tax benefit of approximately $150 million in the period, which we adjusted out for non-GAAP purposes. We expect another $30 million to be recognized during the remainder of the year. We now expect our 2024 effective tax rate, excluding the full $180 million to be in the range of 20% to 25%. Turning to cash and liquidity. We ended the quarter with approximately $820 million in cash and the full $300 million available under our credit facility. Last week, we successfully extended the maturity of our Term Loan B to August 2031 and repriced the loan at a lower interest rate, which will reduce cumulative interest expense over the term of the loan by approximately $17 million. Our commitment to drive profitable growth and positive free cash flow is paying off, resulting in our ability to expand margins and strengthen our overall financial profile. Now turning to our 2024 outlook. For the full year, we are once again raising our expectations for total Omnipod revenue growth to a range of 18% to 21%, representing a milestone of $2 billion in annual revenue at the high end of our range. As a result, we also are raising total company revenue growth to a range of 16% 19%. For US Omnipod, we're raising the low end of our revenue guidance and now expect a range of 18% to 21% growth. We expect growth be driven primarily by continued strong demand for Omnipod 5, including the benefits of the reoccurring revenue stream from our annuity model and growing customer base. As a reminder, we have a tougher comparison in the second half of 2024 versus the prior year period resulting from the estimated orders that were accelerated in the fourth quarter of 2023 from 2024. We continue to anticipate both revenue dollars and new customer starts in the second half of 2024 to be higher than levels in the first half. While we continue to expect sequential growth in new customer starts in both Q3 and Q4, our guidance now contemplates a less steep ramp of new customer starts in the second half of 2024, driven by both the overall market reduction in competitive switching that Jim referred to, and the slightly longer facing period of our G7 Pods through our retail channel partners. While the latter has a temporary impact on new customer starts during the second half, it is simply timing. We are confident this strategy will maximize the customer and HCP experience, which is our top priority, while having the added benefit of limiting returns of the G6 Pod in the channel. Our revenue guidance continues to assume a gradual restocking in the second half of this year as we expand our distribution of G7 Pods throughout all channel partners. For international Omnipod, we are raising our revenue growth expectations by 600 basis points to a range of 18% to 21%. On a reported basis, we now assume there will be no foreign currency impact. We anticipate revenue growth to be driven by the strong momentum from last year's Omnipod 5 launches in the UK and Germany, partially offset by headwinds in countries where we do not yet have Omnipod 5. Our 2024 outlook for international business is strengthened every day by the success we are achieving with Omnipod 5. Greater-than-expected new customer starts today, as well as revenue outperformance, has resulted in raising our international Omnipod outlook by 1,100 basis points since the start of 2024. Omnipod 5 is gaining traction and taking share. Feedback has been tremendous, and we are clearly a leader with our advanced technology. While we expect our most recent Omnipod 5 launches to contribute new customer starts in the second half of this year, given the nature of our annuity model, we expect them to contribute even more meaningfully to revenue in 2025. Our incredible momentum internationally strengthens our confidence that Omnipod 5 will drive further growth and share gain in every market in which we launch. For both US and International Omnipod, our guidance factors in quarterly revenue fluctuations resulting from the many product launches we have in 2024. This includes ramping inventory in the channel for new launches and reducing levels of prior Omnipod generations. Lastly, for drug delivered, our outlook has improved and we now expect a decline in the range of 40% to 50%, reflecting our partner's revised forecast. Turning to 2024 gross margin. Given our strong margin performance in the first half of 2024 and the retirement of some risks we had modeled related to our product launches and new manufacturing facility, we have greater confidence in our full year 2024 outlook. As a result, we now expect to land closer to the high end of our 68% to 69% range, even with the 70 basis points annualized impact from the second quarter Omnipod GO charge. We are in a tremendous position to drive further gross margin expansion over the near and long term, and we remain committed to executing our strategy to deliver this growth. We remain committed to driving operating margin expansion as we capitalize on our efficiencies and economies of scale. Even as we continue to heavily invest in commercial, clinical and R&D to fuel our strong revenue growth trajectory. As a result, we are once again raising operating margin guidance another 50 basis points to approximately 14%. Turning to our third quarter guidance. We expect total Omnipod growth of 21% to 24% and total company growth of 18% to 21%. For U.S. Omnipod, we expect growth of 21% to 24%, primarily driven by strong demand for Omnipod 5, stronger customer starts and the benefit of our immunity model. For International Omnipod, we expect growth of 21% to 24%, driven by ongoing adoption of Omnipod 5, partially offset by headwinds in countries where we do not yet have Omnipod 5. On a reported basis, we now assume an unfavorable foreign currency impact of 100 basis points. Finally, we expect Q3 drug delivery revenue to be approximately $3 million to $4 million. In conclusion, our global Insulet team continues to execute and drive strong results. We generated robust new customer starts globally and our cascade of innovation strengthens our position to deliver sustained revenue growth and margin expansion this year and beyond. With that, operator, please open the call for questions.

Thank you. [Operator Instructions] And your first question comes from the line of Robbie Marcus with JPMorgan. Your line is open.

Okay, that's helpful. And then just on the implied fourth quarter guidance, either for Ana or for you, Jim. When I look at the U.S. Omnipod guidance, depending on what I pick is the midpoint or the point -- I decided to in 3Q within your guidance, the implied kind of the fourth quarter U.S. Omnipod growth probably where from low single-digits to low double-digits, the bigger range there because we're taking a point estimate in 3Q. You obviously had anywhere from 6 to 9 points depending on how much we count the pull forward into 4Q 2023 last year, that's kind of a year-over-year headwind. When I put all that in the hopper, it seems like you're kind of talking about fourth quarter U.S. Omnipod growth in the low to mid-teens. One, is that a reasonable way to think about how you're thinking about adjusted U.S. Omnipod growth? And is that where we should be thinking about as kind of a stepping off point for 2025? Or is there other things in 2025, like type 2 in that, that can maybe take you above that low to mid-teens U.S. Omnipod growth? Thank you.

Jeff, I'll start with that. Thanks for the question. You are absolutely correct. There are absolutely a lot of puts and takes, especially in the fourth quarter. The important thing to recall here is that our overall guidance for the year continues to be strong, and I know you're referring here specific to the U.S. with that high end of our guidance at that 21%. So, we raised the volume at 18% up to the 21%. I do want to mention something as we think of 2025, which we are not providing guidance during this call. We'll wait until we wrap-up the fourth quarter. We have a lot of things transpiring here, as Jim mentioned in the second half of the year. G7, we have iOS. We have Libre 2 Plus. We have the international that it's really ramping incredibly nicely and more countries ahead and we have the type 2 label extension. Once we have more clarity into the later part of the year, we'll come back and provide that additional guidance.

And your next question comes from the line of Larry Biegelsen with Wells Fargo. Your line is open.

Good afternoon. Thanks for taking the question. Hey Jim, one clarification on new starts for me. Did you say overall U.S. starts -- new starts to be up in Q3 and Q4?

Yes. So, Larry, I know we're actually going to get a lot of clarifying questions on this. I'll just -- let me see if I can characterize it clearly. I'll give it another try. So, we expect sequential growth in the U.S. in new customer starts in Q3 and then again in Q4. And that's consistent with what we've said over the course of the last two quarters, where we expect the second half to be stronger and sequentially stronger two, three, four -- Q2, Q3, Q4 over the course of the year. And the ramp characteristics remain the same. The big tailwind driver for us is G7 and then we have other tailwinds coming. I think that one question that I'm sure people are asking themselves is what does that mean in terms of where we land. And there's two things that have changed in the quarter. One is, as I said, there's a smaller portion of the market overall is competitive switching, although we continue to win clearly in competitive switching. And the other thing is, as we said in the prepared comments, is our G7 launch is going very well through the specialty pharmacy channel and the ramp is good. Demand is good. We're servicing it really well. But we made the decision because of that to not disrupt the customer experience and the channel experience to let inventory flow more naturally into that channel. And so both of those things create a little bit -- I would say, a little bit of a change in our outlook on total new customer starts in the second half. And so as Ana characterized in her comments, we expect a steep ramp, but the ramp in the second half is probably a little bit less steep than we had been expecting before. Now where that lands in terms of total year new customer starts, is hard to characterize each of those -- each of those two dynamics are kind of hard to quantify neither of them is that big. But combined, what we're expecting is a less steep ramp in the second half, but still a really good ramp in the second half in new customer starts in the U.S.

Okay. So Jim thanks. And so margins, that's what I wanted to ask about. If I take out the onetime charge in the second quarter, your gross margin in the first half, I think, was about 70%. The implied -- even with keeping the one-time charge in, it's about 68.5%. So why the lower -- lower gross margin in the second half versus the underlying first half? And how should we think about the benefit to your gross margin from Malaysia beyond 2024? Thanks.

Yes. Let me jump into that. So in the first quarter, we had gross margin of 69.5%, and now we have 67.7%. So that gets us shy of the 69%. And in the second half, we expect to be, as you can imagine, we're guiding to the full 69%. So that's going to be higher than the 69% to make the overall. So that guidance, I just want to be clear, contemplates that contemplates that 70 -- for the full year 70 basis points of pressure, we did not back that out from our guidance. We kept the Omnipod GO charge that we took this quarter in our guidance. So hopefully, helps answer the question. Malaysia has a more limited impact. So as it's starting to produce product. And we expect to get more of that benefit, as we move into 2025 and the first full year of running operations.

And your next question comes from the line of Margaret Kaczor with William Blair. Your line is opens.

Hi. Good afternoon, folks. Thanks for taking my questions. I guess one on International and one in the U.S., and apologies for having both in here. But internationally, obviously, you're seeing a tremendous amount of traction. So can you give us some sense around how much of the beaten guidance range this quarter is related to new patient adds in these two countries, the two new countries that you are in? Are seeing kind of this change in MDI starts just in general, where you can start to say, hey, this is a market trend. This isn't just, hey, we're taking competitive switches or more new patient adds, which I'm sure is part of it. But just trying to get a sense of what's going on, on the ground? And is it happening similar as we saw in the U.S. a few years ago. And then just on the U.S. side and this is a clarification question that may be helpful may not. But the change in competitive converts, historically, 20% of new patient adds or competitive converts. Now you're saying it's 15%. So the delta seems pretty minor 5% but correct me if I'm wrong on that. Thank you.

Yeah. Thanks, Margaret. I'll take both of those. On international, we're so pleased with Omnipod 5 internationally. It clearly wins wherever we're able to take it. The U.K. launch continues to go extremely well. The Germany launch is going extremely well and off a very strong performance in previous quarters, we -- both of those countries continue to perform ahead of expectation. We've just launched in France. It's very early. France is a really big market for us, but we know we have big demand, and we're rolling that out. We have patients on product and that's beginning to ramp. And then the other launch is, of course, the Netherlands. And -- when we launched the Netherlands, that was our first -- when we entered that country, entered it with our sensor of choice offering, which is G6 and Libre 2, and we took that center of choice offering into the UK, where we were already on market with G6, and that offering is going great. So these are largely MDI growth, driven growth phenomenon in all of those countries. As you know, internationally, most people who are on technology are locked into their contracts. And so it's largely MDI new-to-market customers. Many of them are already on a CGM because CGM paves a road for us, but they're largely new to market pumpers, and we're really, really pleased with the performance, and it makes us very bullish as we continue to roll out Omnipod 5 internationally. On the US dynamic, yes, I mean we're trying to characterize it. It's a little bit odd. We know there's lots of questions about what's going on out there. But you're right, the mix shift is -- that kind of percentage mix shift. That's consistent with what we had last quarter, 85-15. But as we look at the market, what we see as a trend now where just total base of competitive switching out there is smaller. It's a smaller part of the market. It's never been our focus in the business. It's not our focus. Now our focus is market growth. But that 85-15 split is actually not that big a deal. We just want to characterize the dynamic. MDI, we were up in MDI type 1 in the US., up in MDI in type 2, and we very clearly lead in MDI. Although we also win in competitive switching, that's a smaller part of our market and a lower emphasis for us strategically.

And your next question comes from the line of Travis Steed with Bank of America. Your line is open.

Hey, I wanted to clarify a couple of things from the earlier questions. So Jim, did you say new starts can grow year-over-year in the second half of the year? And also I wanted to clarify, you were commenting on demand is good, but you made a decision to disrupt the customer experience and let inventory grow naturally. So that creates a [indiscernible] in the outlook in the second half? So I really wanted to understand kind of what you make...

Travis, It's -- I hope I didn't say it that way. I meant the exact opposite of what you just said, which is we don't want to disrupt customer experience. So what's going on with the specialty pharmacy launch, we've used that kind of specialty pharmacy approach a couple of times in the past, especially as we entered pharmacy. We've actually upgraded the way do it, so with this launch. And with -- this is the first time that we've brought kind of a new compatibility to the Pod into the same channel under the same reimbursement code. And so figuring out how to feather that in and focus our built inventory on new customers has been what we've been designing to do. And we decided to take that into pharma -- into the specialty pharmacies because it allows us to focus on new starts rather than driving a lot of conversion in the base, which doesn't grow our customer base, right? So by taking it through specialty pharmacy, we're focusing on growing our new customer base, which is really important to the business and brings new customers into the market. And as we did that, it wasn't fair to us as we planned it because it was the first time what dynamic would be. The dynamic is great. We're actually really well able to service very strong demand for G7 through specialty pharmacies. And saying that, I should also point out, those specialty pharmacies, the most of them were through multiple pharmacies there through kind of a hub service that we've set up. And most of them are not visible to third-party data. So if people are out there trying to watch our new customer starts, they won't be able to see most of our G7 starts through other reporting mechanisms, for example, like IQVIA. So demand is really good, and it's flowing so well and we can flex it. And so that customer experience has been great. Therefore, we've decided not to force inventory into the retail channel, which would be potentially disruptive both for our channel partners and for customers. So we're going through specialty pharmacy. It's going very well, and we're going to let the inventory transition in retail at a more natural pace. So that's why it's really because of a new customer -- we want to deliver the strongest possible customer experience, and we're happy with how specialty pharmacy is going. So that's on that question. On the first part of your question, year-over-year growth, I think we expect during the second half to cross over into year-over-year growth, it's hard to call exactly when that happens. But the expectation is yes, we get year-over-year growth in the second half.

And your next question comes from the line of Michael Polark with Wolfe Research. Your line is open.

Thank you. Okay. I'll ask a follow-up on the Type 2 update. The decision to prioritize 05 over go, I'm interested -- is your expectation that that the SECURE-T2D label or data will allow you to market both the MDI and basal-only population? That's one question. And then the second piece is pricing? Would you expect kind of patient-agnostic pricing for this product? And the third is -- I heard about the investments in the back half to set the stage for the Type 2 launch next year. Any way to frame how much you expect to expand head count through this process? Thank you so much.

Thanks, Mike. Thanks for the question. The first thing is, yes, I don't want to get too far in front of the FDA on the actual label, but the label we anticipate would allow us to market to both intensive insulin and basal insulin users. So that's the aim. And SECURE-T2D backs that up because 20% of the participants in SECURE-T2D were basal-only users, and they have fantastic results. And so the goal of Omnipod 5 is to get out there and help people who are on insulin who need better control because of the fantastic smart adjust algorithm and its ability to -- as you know, we adjust both basal and adjust for real-time bolus. And so that's the goal. And therefore, if we're able to achieve that labeling, we can help basal-only patients with Omnipod 5. And I know that know that you the initial plan was to start people on Omnipod GO and then as their insulin needs change get them on to Omnipod 5. And the beauty of this strategy is that we don't have to wait to have people going to Omnipod 5. Contingent on FDA labeling, which we expect, and I don't want to get in front of it and all those caveats, we think we can just -- we don't have to wait for Omnipod 5, we just take it to market as Omnipod 5 and meet the needs of a very wide range of patients than we were going to be able to meet. So we're excited about that. And Ana forgotten already the second part of your question. So...

No, I just wanted to add maybe a comment there. When you think of the implications of that decision, it's not just a short-term impact that we just talked about. There is a much longer-term impact. Jim commented on the customer, commercial, all those things that there's also an operational impact in the company with less product life cycles, simpler in terms of our manufacturing capacity and operational and all those things that come along with that. It's going to have its fruits much longer into the 2025.

Yes, we're really excited about being able to go on to the Omnipod 5 platform as the flagship offer there. I remember your other two components, Mike, so quickly on pricing. We don't anticipate -- I mean, Omnipod 5 is already well covered, well reimbursed for people with Type 2 diabetes. There's -- right now, there's no distinction, and we don't expect big commercial changes on that front. We'll see what happens, but we don't expect any disruption. And then on the other side of that, with the sales force, we've been successfully adding sales force heads now for some time. We added some earlier in the year. We'll continue to add sales force. We'll have more to say about the scale of that and the model for that as we get closer to actual launch.

And your next question comes from the line of Matt Taylor with Jefferies. Your line is open.

Hi, thank you for the question. Maybe I could just further get some color and help clarify a couple key things we've been talking about on the call. One is I did want to ask you about -- you mentioned channel mix benefits in this quarter. And I'm wondering if you could talk about the source of those? And I guess just the outlook for that in the US and as a company, as you have a lot of shipping sand in terms of the different channels and how the mix could evolve?

Sure. I'll start with that one. So when you think of the US, and we are very heavily penetrated now in the pharmacy channel, what we have is we ship product and then we have, of course, the wholesalers, the distributors and the PBMs, and at the end, it's the end customers. So how it moves into, which specific distributors with what relationships, and which PBMs with what coverage. That all is hard to call. And now what we're talking about is not huge dollars, what I described in terms of the impact, but we should have some fluctuation in our pricing as we go through that process. So we will continue to refine our models and just continue to get better and better around that. But it's really a simple dynamic of being now so heavy into the pharmacy channel.

And your next question comes from Chris Pasquale with Nephron. Your line is open.

Thanks. I had one on International and one on the GO decision. On OUS, by our math, your International installed base share is well-below where you are in the US. I'm curious though, when we look at that overall international market, what percentage of those patients are in geographies where you have a presence today? In other words, how much of that pie are you really able to compete for?

Yeah. Thanks, Chris. Internationally, as you know, we're only in 24 markets OUS. And the larger markets are obviously the usual suspects of large markets, UK, Germany, France, Nordics. And so we're in the U. with Omnipod 5 now in Germany with full releases and growing really, really well. France, we're just out of the gate with the Omnipod 5 launch in France. And then as we said in the prepared remarks, Nordics is on the list for coming launches. And then -- and you can -- just by population, I think all the medtech markets are fairly similar in terms of total opportunity. So we feel really good about where we are with Omnipod 5. It's clearly winning where we take it. And as we roll it out, we're very bullish on growth, which is what led us to another 600 basis point increase in guide.

And your next question comes from the line of Mike Kratky with Leerink Partners. Your line is open.

Hi, everyone. Thanks for taking our questions. Maybe just a couple on the type 2 launch. First of all, is your plan to implement a full commercial launch in type 2 once you get approval? Or could that be a more sequence launch? And then maybe just a quick one on the basal-only population, but based on the updates today, can you provide some color on the level of demand that you saw for pumps in the basal-only population? And does that change your outlook at all as you think about Omnipod 5?

Thanks, Mike. In terms of full commercial launch, I mean, what we've done is we've choreographed our plan for the launch in line with what we expect in terms of FDA approval. And so -- we expect FDA approval by the end of the year. And once we have that and with all the other pieces in place in terms of things like sales force training so on, we'll be able to promote in line with that. But we also anticipate, as I said, we'll say more -- we'll give more detail as we get closer to that. We anticipate also expanding our sales reach into nonspecialty channels by adding some feet on the street. And that just gives us more share voice into those markets. And so we'll have more to say about that later. But we do anticipate being able promote as we get clearance. The second side of your question around basal -- thank you. With basal, Omnipod GO product, we were out there looking at how do patients present in the channel. And we saw a number of patient profiles. So we went in with draft patient profile that I won't try to detail. We then -- we added a patient profile to that. And what we found was that there are a lot of patients in the non-specialty channel. There's different patient profiles with type 2 diabetes that need insulin, and there's also a lot of type 1 patients in there. So we're very confident that there's a lot of patients that -- whose needs we can address with Omnipod 5. And if anything, I would say, focusing on to Omnipod 5 makes us even more bullish about our ability to penetrate that market. So we learned a lot as we are in those practices about what's happening in there and which kinds of patients are in there. And we're really excited about taking Omnipod 5 as the flagship product for the patient journey into those channels and to reach those patients.

Thanks, Jason, and thanks for the non 15 question list. So that -- so on type 2, yes, we're very confident. I mean, type 2 -- Omnipod 5 right now is reimbursed through the pharmacy benefit. There's not a request for which type of diabetes. It's a script that's written for Omnipod 5, and it's very well covered on that basis, and that's why physicians are writing off label for it. We did see an increase in MDI starts for type 2 patients in the quarter. We don't call out whether that's Omnipod DASH, which has the full indication for user, Omnipod 5. We did see some lift in MDI for type 2. We are not promoting Omnipod 5 for type 2 diabetes because we do yet have the indication for use expansion that will allow us to do that. And our reps, as I've said before, have one arm tied behind their back for that. So we're really bullish on that. But we have seen some lift. And we think the coverage should be final. There shouldn't be any delay in coverage for Omnipod 5 in type 2.

Thanks, Matt. So I'll start with your comment on inventory tailwinds. So as we talked about last quarter, we were anticipating a destocking of about $10 million, which we saw happened during the second quarter. And what we anticipate is during the second half of the year that should come back. And the reason it is all around the G6, G7 transition and how we're managing the channel through that process.

Thanks, Matt. On the MDI question. I won't try to probably together any of our competitors' results. I'll just say that I think it's reasonable to think that MDI penetration in type 1 is accelerating, and we're clearly leading that. So Omnipod 5 is very highly preferred with MDI patients. We continue to grow that space and we continue to win with MDI conversions. I think it's durable for both type 1 and type 2. And the reason I believe that is because the burden of living with diabetes remains very high and because our CGM partners have been out paving road very effectively in front of us for some time. And so, we've said before that we think penetration for AID in the type 1 space can go very high, well above 70% on the back of the pave road from CGM, and we're confident that we're going to be the leader that drives that kind of penetration. And we believe that now you see a lot of adoption in type 2 space with CGMs on an ongoing basis. And so our two partners, Abbott and Dexcom, are out there paving road for us in type 2, and we see a big opportunity to take Omnipod 5 likely as the first-to-market AID system in that space, you see a big opportunity to drive the penetration of Omnipod 5 and type 2 as well.

And your next question comes from the line of Steve Lichtman with Oppenheimer. Your line is open.

Thank you. Good evening, everyone. On the international strength you were seeing versus you're thinking heading into the year, are you seeing better reimbursement and pricing in addition to faster new patient growth? Or is it is it -- all better volume? And can you remind us when you could have a G7 connectivity internationally?

Thanks, Steve. Yes. So what we've done, and we've referred to this in the past, as we launch Omnipod 5, we work really hard to make sure that our reimbursement is commensurate with the additional value that Omnipod 5 creates for the health care system and for patients. And so we've been able to, so far, so good, successfully negotiate a premium for Omnipod 5, where we've launched it. And so it is both volume and a bit of a price benefit. And -- but volumes are very, very good, obviously, with -- the starts are very, very strong for us with Omnipod 5 where we've taken it. And then again, I'm forgetting the second half of the...

The G7 International.

G7, we haven't announced timing. So we're obviously working on it. We have a very effective working G7 integration, which is creating a big tailwind for us in the US, we'll get it into European markets as soon as we can, but we have not yet announced timing.

And your next question comes from the line of Joanne Wuensch with Citibank. Your line is open.

Good evening. Thanks for taking the question and very nice quarter. Yesterday, there was an announcement that I think took a lot of people by surprise, the agreement between Medtronic and Abbott. I would love your opinion on how this changes or doesn't change the AID, and really diabetes delivery landscape. Thanks.

Thanks, Joanne. Yes, we're very happy with our two CGM partners. We have a great relationship with Abbott. We have a great relationship with Dexcom. We're working really well with both of them. We're very excited to announce that we'll be bringing the Libre 2+ integration to the US market by the end of the year. And for us, we have a clear road map for Omnipod 5 platform expansion that includes sensor expansions, and it's full speed ahead. We remain very confident in our competitive position. Omnipod 5 is extremely differentiated from two pumps and will continue to be. And so we're very bullish full speed ahead with both of our partners.

And we have time for one last question. That will be from Bill Plovanic with Canaccord Genuity. Your line is open.

Hey. Great. Thanks for taking my question and congrats on a good quarter. In terms of the gross margin, from shifting over to Malaysia, how much gross margin longer-term benefits should we see from that? And then how much do you pick up by eliminating GO, which potentially was probably a lower gross profit product, I would assume. Just kind of curious what that does for the longer-term GMs. Thanks for taking my questions.

Great. Let me get started on that. So as we commented, we have really strong gross margin once you back out the impact -- the one-time impact of GO. We have stated before and continue to state Malaysia strategic for us. In the first 12 years, we will be accretive. So at the moment, we're ramping, so that will take time. So you can expect that, that will be accretive right at around that one-year mark and will continue to be. And the other point being the product life cycle. So by taking manufacturing time away from shifting lines and all of those things, we'll anticipate that. We're not providing long-term guidance here. So we'll come back and provide more color after we wrap up here in 2024. I do want to take the opportunity to come back to some of the early questions on new customer starts and clarify just to make sure everybody is on the same page. So new on customer starts, we expect sequential growth, second quarter to third quarter, third quarter to fourth quarter that to be true, US, international, of course, globally. And we already talked about all the reasons why that would happen. The question came up around year-over-year. And I want to also reiterate not only globally because it's obvious that international is working so well, but to a lesser extent, but it's there. Our guidance contemplates year-over-year growth in US NCS. So I just wanted to make sure that that was clarified for everyone.

And ladies and gentlemen, this concludes our question-and-answer section. I would now like to turn the conference back to Mr. Jim Hollingshead for closing remarks.

Thank you, operator. In closing, we're very pleased with our Q2 and excited about our coming second half. Our cascade of innovation continues with our G7 tailwind, iOS and Libre 2 coming to the US and we're eagerly anticipating TAM expansion with FDA clearance for Omnipod 5 and type 2. Our international business continues to outperform on the strength of Omnipod 5. All of that led us to raise our guide across the board. And none of that would be possible without our amazing global Insulet team who get up every morning to change the lives of people living with diabetes. Thank you, global team. And thanks for joining us, everybody, today. We look forward to updating you next quarter.