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Insulet Corporation (NASDAQ:PODD)
Q3 2018 Earnings Conference Call
November 1, 2018, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon, ladies and gentlemen, and welcome to the Insulet Corporation third quarter of 2018 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. If anyone should require assistance during the conference, please press * then 0 on your touchstone telephone. 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 and Corporate Communications.

Deborah Gordon -- Vice President of Investor Relations and Corporate Communications 

Thank you, Crystal. Good afternoon and thank you for joining our third quarter 2018 earnings call. Joining me today are Patrick Sullivan, Chairman and Chief Executive Officer, Shacey Petrovic, President and Chief Operating Officer, and Michael Levitz, Chief Financial Officer.

The replay of this call will be archived on our website and our press releasee discussing our third quarter 2018 results and fourth quarter and full year 2018 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 involve known and unknown risks and uncertainties that may cause actual results to be materially different from any future results implied by such statements.

Such factors include those referenced in our safe harbor statements in our third quarter earnings release and in the company filings with the SEC. Unless otherwise stated, all financial commentary regarding dollar and percentage changes will be on a year over year basis. With that, I'll turn the call over to Pat.

Patrick Sullivan -- Chairman and Chief Executive Officer

Thanks, Deb and good afternoon, everyone. After my opening remarks, Mike will provide detail on our third quarter results and 2018 guidance. Shacey will follow with an update on our achievements and key milestones and then we'll open the call up for questions.

I am absolutely thrilled and impressed with the outstanding performance of the company in the third quarter. We achieved another record quarter revenue of just over $151 million, representing year over year growth of 24% and finishing at the top end of our guidance range. We achieved another quarter of impressive gross margin expansion to 67%, a 700-basis point improvement from a year ago. We also delivered positive operating income of $7 million and are on track to deliver positive operating income for the full year for the very first time in Insulet's history.

In addition to our strong performance, we accomplished a great deal during the quarter on our key initiatives that will contribute to our long-term growth, namely the limited market commercial release of our next-generation Omnipod Dash system, an exciting update on Horizon, our automated insulin delivery system, our direct commercial operations in Europe, and the buildout of our Massachusetts manufacturing headquarters. I'll provide a brief update on each of these initiatives and Shacey will share additional color commentary in her remarks.

Our limited market release of Dash is well under way and we are receiving valuable patient feedback with overwhelmingly positive reviews. We are very excited to have this new product in the hands of our customers. We are making great progress on our Omnipod Horizon development program. Based on compelling market research and terrific work by our development team, we are now thrilled to inform you that our Horizon automated insulin delivery system will be controlled by an app on the user's own mobile phone.

Since I joined Insulet four years ago, smartphone control of Omnipod has been the most desired feature expressed by people with insulin-dependent diabetes. In the last four years, advancements in BLE communications and cybersecurity combined with the outstanding work of our technical team have made phone control of Omnipod a reality. Because of the tubeless nature of Omnipod, we will be able to provide an outstanding customer experience not possible by any other product on the market today. This development is a giant leap forward for the diabetes community and we are thrilled to finally make it possible.

Now, turning to our direct operations in Europe, our July 1st transition from distributor to direct operations market a significant inflection point for our business. We expect to exit this year with an international business revenue run rate of more than $200 million and a long run rate for future growth.

The entire organization managed through this transition to Europe with great speed and extraordinary effectiveness. Now that we've had direct operations in Europe for the past four months, we are more confident than ever in the strength of the existing business, the sizable market, and our opportunity to further accelerate growth.

Finally, I'd like to highlight the tremendous progress we've made in building our new state of the art manufacturing facility and company headquarters in Massachusetts. The facility is newly complete and in a few weeks, we will begin installation of our first highly automated manufacturing line in the United States. We are on track to begin production early next year. Our US facility will add the needed capacity and redundancy to support our growth. We are wicked excited and proud to bring pod manufacturing and jobs to Massachusetts.

Since this is my 60th and last Wall Street earnings call, I'd like to make a few comments before I turn the call over to Mike. When I joined Insulet four years ago, I was attracted by what I believe could be an amazing product and technology with enormous growth potential. Revenues were roughly $200 million. Gross margins were less than 50%. Market access was very limited. Insulet only had direct commercial operations in the United States and was losing money.

I was very fortunate to assemble an extraordinarily talented team that helped me turn the company around. When I retire at the end of this year, we will have more than doubled revenue, gross margins are closing in on 70%, Medicare and Medicaid coverage is established, we are direct in Europe, and we have a very rich and exciting product pipeline. And our most significant accomplishment is that Insulet has finally made the pivot to profitability.

To say that we've come a long way in the last four years is an understatement. Today, the entire team is focused on driving Insulet forward and significantly improving the lives of people with diabetes. As amazing a ride it's been so far, there are so many more exciting opportunities to seize and patients to serve. I'm highly confident in the extraordinary potential that this company has and the amazing capability of this fantastic team. I look forward to watching all that Insulet will do with this dedicated team and what they will accomplish in the future.

For me, it has been a great privilege and honor to lead Insulet over the past four years. The future of Insulet is very bright and the best years lie ahead. Shacey has been a great Chief Operating Officer and will be an outstanding CEO. She is, without reservation, the right person to lead Insulet's next phase of explosive growth and I have full faith and the utmost confidence in her leadership.

Finally, I'd like to thank all the Insulet employees for their dedication and strong performance, the Board of Directors for their support, our Podder community for their loyalty, and our shareholders for your confidence and trust in the team. Thank you for the opportunity to lead this exception company.

With that, I'll turn the call over to Mike. Mike?

Michael Levitz -- Chief Financial Officer

Thank you, Pat. We continued to make excellent progress and deliver strong growth and I am pleased to walk you through our third quarter financial results and fourth quarter guidance. Our third quarter revenue growth of 24% was at the high-end of our guidance range. US Omnipod grew 17%, reaching $82 million. International Omnipod grew 55%, totaling $50.2 million, and drug delivery was $18.9 million, down 2%.

We once again drove significant gross margin expansion, reaching 67.5%, up 700 basis points, exceeding our expectations. The considerable productivity and cost improvements we've realized in our purchasing, manufacturing, and supply chain continued to drive this expansion as well as an incremental benefit of approximately 400 basis points from our successful transition to direct operations in Europe.

Our operating expenses totaled $95.1 million, up from $71.6 million. This included spending in Europe, which is in line with our expected run rate of $45 million to $50 million and included a non-recurring charge of $12.6 million for severance-related benefits due to our announced CEO transition, most of which is non-cash.

Operating expenses were favorable to our expectations, due primarily due timing, which we now expect to occur in the fourth quarter. As a result of our significant revenue growth and the gross margin expansion, we successfully made the pivot to profitability, delivering a positive operating margin of 4.5%, with operating profit totaling $6.9 million.

As Pat noted, we expect to achieve full-year operating private for the first time in Insulet's history, consistent with our stated objective. We also reached net income for the first time in Insulet's history and are on a strong trajectory for both growth and profitability, on track for our multi-year objectives.

We ended the quarter with over $435 million in cash and investments compared to $566 million at the end of last year, due primarily to capital expenditures as we invest in US manufacturing and supply chain operations in line with our plans.

I will now update you on our fourth quarter and full year 2018 outlook. For the fourth quarter, we expect total company revenue of $159 million to $164 million, representing growth of 22% to 26%. This includes US Omnipod of $89.5 million to $91 million, representing growth of 17% to 19%. International Omnipod of $52.5 million to $55 million, representing growth of 47% to 54% and drug delivery of $17 million to $18 million, down 2% to 7%.

For the full year, we have raised our revenue outlook to a range of $558 million to $563 million, representing growth of 20% to 21%. This compares to our previous expectation of $547 million to $562 million. For full-year revenue by product line, we expect US Omnipod in the range of $320 million to $321.5 million, representing growth of 18%. This reflects our continued confidence in the growth of our customer base given this year's market access wins and strong commercial momentum overall. We also expect international Omnipod in the range of $169.5 million to $172 million, representing growth of 41% to 44%,

For drug delivery, we expect revenue of $68.5 million to $69.5 million, representing a decline of 4% to 5%. Moving down the P&L, we now expect the 2018 full-year gross margin will be 65% to 66%, a year over year increase of between 500 and 600 basis points. We are thrilled with the tremendous progress we have made in margin expansion. While we expect the ramp of our US manufacturing next year to present a near-term headwind, we are well-positioned to achieve our longer-term gross margin objective of 70% in 2021.

Finally, as I mentioned earlier, we are incredibly excited to deliver operating profitability this year and are reaffirming our expectation of full year 2018 operating margin in the low single digit percentage range. Our successful pivot to operating profitability even while investing significantly to continue to drive 20% or higher annual revenue growth is a tremendous milestone for Insulet.

In summary, 2018 has been another year of high growth and successful execution to our business. As Pat mentioned, we have accomplished many operational, commercial, and financial milestones this year. At the same time, we remain laser-focused on the future.

Given the positive fundamentals and catalysts for growth across our business and our current growth trajectory, are well positioned to continue delivering significant topline growth and operating income and we are confident in our ability to achieve our 2021 financial targets.

I will now turn the call over to Shacey.

Shacey Petrovic -- President and Chief Operating Officer

Thanks, Mike. I echo Pat and Mike's enthusiasm about our team's incredible progress. We're pleased with what we've delivered and we're just getting started. We believe our accomplishments today are building a strong foundation for future growth and I'm excited to share some of our key developments with you.

Our global customer base continues to rapidly expand and in the United States, Q3 was another quarter of record new patient starts. We are reaffirming our expected US Omnipod customer base growth of 18% to 20% and expect to finish at the high-end of that range. We are reaffirming expected international customer base growth of 20% to 25%.

The first full quarter selling direct in Europe has confirmed our view that there is tremendous opportunity within our existing markets in the near-term, plus a longer-term opportunity to expand into new markets across Europe and the rest of the world. We have a completed a successful transition to Insulet Europe and are achieving our customer support and satisfaction goals.

Our team of almost 120 very talented and experienced people is fully deployed across Europe and our focus now turns to growth. I was with our team at last month's European Association for the Society of Diabetes meeting in Berlin. This marked Insulet's first European conference since taking our operations direct. It was clear that we are already benefiting from our move to establish Insulet Europe.

Over the course of the week, we were able to meet with hundreds of European key opinion leaders and we completed substantial market research which will shape our innovation and expansion plan. Our success at the conference was a strong indication of the tremendous support and opportunity we have throughout Europe and other international markets.

Moving on to our market access efforts in the United States, our team is very effectively expanding Omnipod coverage. This year, we had three market access objectives. First, to secure and pull through Medicare Part D coverage for Omnipod, second, to expand Medicaid access, and third, to establish pharmacy coverage for our next gen system, Omnipod Dash.

I am pleased to say we are accomplishing each of these objectives. At the end of September, we secured almost a third of Medicare Part D covered lives for both Omnipod and Omnipod Dash, including large Part D providers, like Optum, Express Scripts, and Magellan. We have also had one of 1,000 Medicare beneficiaries gain Medicare coverage through the exception process, where applicants are averaging a greater than 80% success rate.

Medicare beneficiaries can select a Part D plan that covers Omnipod or pursue Omnipod coverage through the exception process and will now have Omnipod covered. I am incredibly pleased with where we are today and confident our coverage will continue to grow for our Podder community.

We also continue to strengthen our Medicaid coverage position and as of today have an Omnipod coverage for approximately $33.5 million or about 45% of all Medicaid cover lives. We expect this number to continue to grow during Q4 and throughout 2019.

I am delighted with the progress we have made establishing coverage for our next generation platform, Omnipod Dash. By the end of Q3, we had approximately 75 million covered lives for Dash. We are thrilled that a growing number of people will now have access to Omnipod Dash to help manage their diabetes.

The work we are doing to develop pharmacy access and migrate more customers through this channel is strategically important because it provides several competitive advantages. For the patient, pharmacy provides a better customer experience with lower out of pocket costs and no upfront fee to get started on Dash.

For the physician, Omnipod can be prescribed with a simple e-prescription and less burdensome paperwork and documentation. For the payer, the pharmacy channel is a true pay as you go risk sharing model. For Insulet, this approach offers a lower cost to serve. This shift in business model presents a short-term revenue headwind but neutralizes over a full year and has the potential to dramatically reduce barriers to pump therapy adoption.

Moving on to our innovation efforts, I have several updates to provide in terms of our progress, developments, and timeline. Starting with Dash -- we began our limited market release in July following FDA clearance in June. We expect to engage 1,000 users and 100 prescribers during our limited market release.

User and clinician feedback has been incredibly positive, particularly around Dash's ease of use, intuitive design, and the system's modern touchscreen interface. We know that our current and future Podders are anxiously awaiting Dash and we are working to deliver a terrific experience for the full market release in early 2019.

In addition to strong user feedback, two recent publications in the Journal of Diabetes Science and Technology highlighted Dash's innovative design features and functionality and Insulet's commitment to a user-focused development process. The publications also reviewed the strong real world clinical data and outstanding early feasibility results for our Omnipod Horizon automated insulin delivery system.

We are making great progress on our Omnipod Horizon development program and as Pat noted, we have some exciting news to share -- as many of you know, Omnipod Dash, which was designed as an app on a locked down Android phone was Insulet's first step toward full control of Omnipod from a user's personal smartphone. Because it is the number one innovation request, we have been working hard to address the technical, regulatory, and security hurdles and make smartphone control of Omnipod a reality.

As Pat mentioned in his opening remarks, we are thrilled to announce that following remarkable work from our technical and cybersecurity team and productive meetings with the FDA, we now plan to launch Omnipod Horizon and future generations of Omnipod Dash with personal smartphone control.

Like automated insulin delivery, phone control is a feature that is easily discussed and very hard to implement in a way that provides a secure, excellent customer experience. Omnipod Horizon builds on the ease of use and security of Dash and by allowing users to manage therapy from their mobile phone while wearing just a Smart Pod and a Dexcom G6 sensor, the system will provide a level of freedom, discretion, and ease of use that is unmatched.

While this adds scope and some time to the development process, we are pleased to announce that Omnipod Horizon was recently granted designation in the FDA's breakthrough device program. This program was intended to help patients have more timely access to devices by expediting the development, assessment, and review process. It offers an accelerated review and approval pathway for Omnipod Horizon.

Now, with the breakthrough device designation and the exciting addition of phone control, we plan to complete a fourth IDE and estimate Horizon with phone control will be on the market in the second half of 2020.

Phone control is a significant differentiator for Horizon and a great win for our customers. Paramount to our ability to deliver phone control is our commitment to cybersecurity. Just recently Omnipod Dash was the first comp to receive DTSec certification from the Diabetes Technology Society.

This certification is a cybersecurity standard with the goal of raising confidence in the security of network-connected medical devices through independent expert evaluation. This is a testament to the strength of our cybersecurity approach with Omnipod Dash, which is the foundation for our innovation pipeline including Omnipod Horizon.

Which brings me to our next update -- as many of you are aware, one of the more interesting movements in the diabetes device space today is interoperability. Interoperability is intended to enable pumps, CGMs, and algorithms to be interchangeable components of automated insulin delivery systems. This has been strongly supported by advocacy groups, by industry, and by the FDA.

Omnipod Dash was always designed to be interoperable and we're thrilled to support this initiative by enabling the simplicity of Omnipod to work with other algorithms and CGMs. As a first step in our support of interoperability, we are pleased to share that Insulet is the first pump partner for Tidepool's Loop program.

For those of you who aren't familiar, Tidepool is a nonprofit organization that is working to get an open source iOS-based Loop app and algorithm approved by the FDA. Together, we are developing and interoperable automated insulin deliver system that allows Omnipod Dash to be controlled by the Tidepool Loop algorithm from an iPhone.

This partnership is additive to our internal Omnipod Horizon program and offers a potentially faster route to market, an automated insulin delivery system with iPhone control for our Podders, and a terrific way for us to support the DIY diabetes community.

So, as you can see, we've made great progress on the innovation front with many exciting developments this quarter and we look forward to providing you updates on our progress.

Before we jump into the Q&A, I'd like to take a moment to thank Pat for his kind words earlier in the call and for his friendship and mentorship over the past few years. With Pat at the helm, Insulet has driven considerable operational improvement, developed an exciting innovation roadmap, established a global footprint, and delivered outstanding shareholder value.

Pat, you've been an incredible leader for the company and on behalf of all of us at Insulet, we wish you the very best in your retirement. I'm honored and excited to take on the CEO role, we have great momentum toward achieve our long-term strategic and financial objectives. I look forward to continuing to work with the entire Insulet team as we advance our mission.

With that, Operator, let's open the call for questions.

Questions and Answers:

Operator

Thank you. If you have a question at this time, please press the * and the number 1 key on your touchstone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the # key. We ask that you keep your questions to no more than one plus the follow-up, but please feel free to go back into the queue and if time permits, we'll be more than happy to take your follow-up questions at that time.

Our first question comes from Joanne Wuensch from BMO Capital Markets. Your line is open.

Joanne Wuensch -- BMO Capital Markets -- Analyst

Thank you very much for taking my question and very nice quarter. I want to just circle in on a couple of things. Clarification -- the international number that you just printed, does that include the $11 million you were talking about as a translational fee or fill in the right word there, associated with you changing your distributor in Europe?

Michael Levitz -- Chief Financial Officer

This is Mike. No. There is a termination fee in our agreement with our former distributor. That fee is not in those number. That fee will be determined over the success of 12 months following the takeover that we did on July 1st and that fee will be capitalized as an asset on our balance sheet and spread over a number of years. We do not expect that fee to be material to our P&L in any period.

Joanne Wuensch -- BMO Capital Markets -- Analyst

Okay. It's probably my fault because I sort of rambled along there. What I wanted to understand is is this a clean quarter without distributor impact associated with the transition or was there still a negative headwind in the quarter?

Michael Levitz -- Chief Financial Officer

So, what we said on the last call is we said we expect the fourth quarter to be representative of the ongoing run rate of the business. The guidance that we just gave on this quarter was consistent with what we gave on the last quarter, apart from a small foreign currency headwind. In terms of this quarter, we were very pleased that we successful transitioned the business and had less disruption than we expected could be possible. That was very encouraging and now the disruption is behind us and we're right on track for a $200 million run rate international business coming out of this year.

Patrick Sullivan -- Chairman and Chief Executive Officer

Clean as a whistle.

Joanne Wuensch -- BMO Capital Markets -- Analyst

Clean as a whistle in the fourth quarter. If I may sneak one more in here -- in the United States, how are you thinking about Medicare and Medicaid ramping into 2019? Thank you.

Shacey Petrovic -- President and Chief Operating Officer

Yeah. Thanks, Joanne. We expect Medicaid to continue to ramp in 2019 and less so for Medicare because as we mentioned on previous calls, the negotiation and establishment over coverage happens really between August and October of the previous year for the upcoming year. We think we're in great shape in terms of broad coverage because patients can select the Medicare plan that works for them. We've got some great broad-based plans covering it now. So, we're in good shape.

Operator

Thank you. Our next question comes from David Lewis from Morgan Stanley. Your line is open.

David Lewis -- Morgan Stanley -- Managing Director

Good afternoon. First off, congrats to Pat on retirement and the significant value created for shareholders. I'll miss not having a third time around with you. Maybe Shacey, I'll start with you and maybe Shacey and Mike -- just thinking about the US business this particular quarter, momentum-wise, it was a little lower than the prior quarters. Your guidance implies actually a significant step-up in momentum into the fourth quarter. So, can you just talk about third quarter to fourth quarter trends and is there anything in that number that we should be aware of heading into '19?

Shacey Petrovic -- President and Chief Operating Officer

Sure, I'll just say at a high level and Mike can talk about the guidance. At a high level, we don't see any diminishment of momentum. We had some timing issues in terms of orders in Q3 heading into Q4, but both quarters, very strong and consistent momentum with earlier in the year as we look forward.

Michael Levitz -- Chief Financial Officer

Yeah, David, I would just echo that. There was some timing that moved from the third quarter into the fourth quarter and also, there was some mix in the quarter that impacted the numbers. No, we were very pleased with the trajectory. As Shacey said, we're trending toward the upper end of the range on the install base. The business is growing very nicely.

David Lewis -- Morgan Stanley -- Managing Director

Okay. Maybe two -- one follow-up -- I'll ask two and I'll ask them both together. Just to confirm on the ex-US, Mike, based on your commentary, the thought was you would exit the year obviously in that 20%+ run rate. By my math, I thought the third quarter did better than I expected and the fourth quarter looks stable in the fourth quarter. Do you think underlying the fourth quarter numbers actually getting better than the third is one question for you?

Then to Shacey, you've talked about pharmacy benefit now the last two times you've spoken publicly -- what is the process for getting the penetration of pharmacy benefit? What is a realistic way for us to think about the penetration of the pharmacy benefit channel the next 18 months and what does that mean for profitability of the company. Thanks so much.

Michael Levitz -- Chief Financial Officer

David, this is Mike. I'll take your first question. So, yes, as we said in the last call, we believe the fourth quarter to be indicative of more the run rate of the business. And given the significant disruption that there was in the second quarter, we really knew that we had successfully transitioned the business when we gave our guidance on the last call one month in.

But it remained to be seen, how much channel was in the market and so on. We were very pleased to see that our decision in the second quarter to buy back the excess inventory that are foreign distributor had really did mitigate disruption in the market. So, yeah, we did do better and finished at the high-end of our guidance in the third quarter and are right on track with the natural business growth into the fourth quarter.

One of the things that we did identify as we looked into it is it appeared that the amount inventory that Ypsomed had built up that we talked about on last call had been built up in the second half of last year, probably after the announcement that we were going direct. So, that created a bit of a tougher comp for us in the second half of this year, but there really was much less disruption. Again, I think the actions that we took really made that happen.

Shacey Petrovic -- President and Chief Operating Officer

So, in terms of pharmacy, David, to that question -- so, we see pharmacy as very attractive because it's a growth driver in terms of reducing the barriers for people to adopt pump therapy. As I mentioned, it's a lower cost channel for us to serve. I'm not sure if Mike can comment on specific contribution to margin.

But I will say as we look to 2019, most of Dash coverage is going to happen in the pharmacy. That's where the team is focused. So, the Dash ramp is commensurate with the pharmacy channel ramp. That's a lower cost to serve for us, but does present a little bit of a revenue headwind because we won't be charging for the PDM. That removes a significant barrier and in a given year, that's neutral. Longer-term, we believe it will be a nice growth driver and a nice contributor in terms of efficiencies in the organization.

Michael Levitz -- Chief Financial Officer

Yeah. This is Mike. I would just add on Shacey's point on the margin -- we feel very comfortable with our 2021 target of 70% gross margins. The largest contributor to that is the improvement of operations and the successful launch of US manufacturing where we're making great progress. There are other commercial initiatives.

Pharmacy is a very good initiative to drive growth in the business. We don't expect that's going to be a material contributor to margin at this point. We're new in that space, but we don't expect it to be a detriment at all. So, we're very excited about that opportunity.

Operator

Thank you. Our next question comes from Margaret Kaczor from William Blair. Your line is open.

Margaret Kaczor -- William Blair & Co. -- Analyst

Hey, good afternoon, guys. Thanks for taking the questions. Pat, congrats on everything you've accomplished, obviously. You've had a great ride. First, to follow-up a little bit more on Dash, I guess to ask the question more pointedly, you're about 75 million patients under coverage.

Is there any reason that you wouldn't sell that patient Dash going into next year within at least that 75 million-patient base? And then as we kind of look at our models, should we start to maybe take that -- the starter kit costs out of our models for at least some portion of the patients throughout the year.

Shacey Petrovic -- President and Chief Operating Officer

Yeah, Margaret, that's exactly how I would look at it. As we look ahead and ramp Dash, it will become a bigger portion of our new patient starts. In that patient population, we will not charge for the PDM. I think you're right. When we think coverage, that's when we will focus in terms of new patient starts on Dash and maybe even conversions to Dash.

The limiting factor, we know patients are responding really with a tremendous amount of enthusiasm for the product. The limiting factor is going to be how quickly we establish coverage for Dash. What I'm excited about is we are right where we expected to be, if not slightly ahead. We're going to launch we a great established covered, probably 100 million covered lives. That's a great spot. That's about where we were in 2015 with Omnipod. That will continue to grow as we look forward. We're in a really good spot and it's going to get better, but that is the limiting factor for Dash as we look forward.

Margaret Kaczor -- William Blair & Co. -- Analyst

And I know you guys aren't commenting on 2019 guidance or anything of the sort, but I think it was one of the conferences where maybe Pat had suggested that you expect US to grow probably faster in 2019 than 2018. So, maybe if you guys can elaborate -- is that on patient adds? Is that on revenue? Any color would be great. Thanks.

Shacey Petrovic -- President and Chief Operating Officer

Sure. I'll say we feel great about 2019. I think we've got a lot of momentum heading into the year. We are making a change in the business model and moving to pharmacy. So, that does present potential headwinds, but we don't expect growth to decelerate. We feel really strong. We'll give more color, obviously, on the February call.

Patrick Sullivan -- Chairman and Chief Executive Officer

We've had quarter over quarter record new patient starts this year. So, I would expect that to continue.

Shacey Petrovic -- President and Chief Operating Officer

Noted.

Patrick Sullivan -- Chairman and Chief Executive Officer

I'll be watching.

Operator

Thank you. Our next question comes from Jeff Johnson from Baird. Your line is open.

Jeffrey Johnson -- Robert W. Baird & Co. -- Analyst

Thank you. Good afternoon, all. Pat, congratulations to you, but Shacey, congratulations on the new position as well. I want to start on the pharmacy side. Shacey, I guess my question is as you get more and more pharmacy coverage and as it scales throughout 2018 and 2019, are you seeing any payers steer preference toward Omnipod?

Obviously, it's going to be much easier for the docs to prescribe Omnipod over some of the tubed pumps, but there's also that lower start-up cost, obviously, rather than committing to a pump where we know a lot of patients do drop out in the early part of wearing a pump. Are you starting to see any payers steer preference or move preference toward Omnipod over the tubed pumps?

Shacey Petrovic -- President and Chief Operating Officer

Well, I think that's exactly how we're thinking about it, Jeff. We haven't had preference by payers yet, but it is definitely what's driving the step function change in access and why we've been able to establish so much access for Dash in such a short period of time. If you think about it, we were just approved in June and now, here we are in early November and we've established 85 million covered lives.

It's a great position to be in and a testament to the strength of the model of eliminating the upfront costs and sharing that ongoing risk as the patient goes forward. We're going to look to continue to build on that value proposition with payers as we look to the future, but to me, it's working, just given where we are today with covered lives.

Jeffrey Johnson -- Robert W. Baird & Co. -- Analyst

Then on phone control and the interoperability you talked about as well, am I hearing you correctly by the 2H20 when Horizon would be ready to launch, that would also have that iPump designation or whatever we're going to end up calling that? Then Omni phone control, will it go from Pod to Dash to phone and you can just control from phone or Pod straight to a phone and you can take the Dash handheld out of the equation?

Shacey Petrovic -- President and Chief Operating Officer

So, it will go Pod to phone and you can take the Dash handheld out of the equation. That's what Pat was referring to in his opening remarks, that nobody can really quite match this value proposition because we really are going to eliminate the device the patient is carrying around and really only Omnipod is positioned to do that super well. So, we are thrilled with that configuration, we know it's going to be a winner and working very hard to get it out there as quickly as possible.

And Jeff, I completely blanked on your first question -- oh, iPump -- so, we're not really telegraphing our regulatory strategy. However, we do see that the system today, Dash, is an interoperable system. We fully expect to take advantage of all regulatory pathways for both Horizon and then of course, tactical as well.

Jeffrey Johnson -- Robert W. Baird & Co. -- Analyst

Thank you.

Operator

Thank you. Our next question comes from Jayson Bedford from Raymond James. Your line is open.

Jayson Bedford -- Raymond James -- Analyst

Good afternoon. Pat, congrats on your retirement, well-deserved. I wanted to follow on the last question in horizon and congrats on the breakthrough designation. So, timing on Horizon in second half of 20, will you be able to launch a smartphone-controlled Dash before the second half of 2020?

Shacey Petrovic -- President and Chief Operating Officer

No. I think they're going to come around the same time. We're working as fast as we can to get phone control in. So, we're lucky to be able to include it into the Horizon program, but I think second half of 2020 is when it's coming.

Jayson Bedford -- Raymond James -- Analyst

Just to be clear on the change in business model, the goal here and the expectation is revenue to Insulet per customer on an annual basis is the same under pharmacy versus the currency strategy?

Michael Levitz -- Chief Financial Officer

Jayson, this is Mike. Just to be clear, what we're saying is it is going to be revenue-neutral to the company on an annual basis. That's what we're saying. So, what we were trying to speak to there is we think pharmacy is a tremendous opportunity. By offering a no-charge PDM, that does present a headwind in the period where you have a new patient start. But we're charging a little bit more for the pod and as you spread that across, that covers for the lost PDM revenue. We believe it provides a benefit for everybody involved -- payer, physician, patient, and for us.

Jayson Bedford -- Raymond James -- Analyst

Very clear. Just one quick one here, Mike -- the non-recurring expense of $12 million, that was all included in G&A? Then as a quick follow-up, how does the cost structure change in the fourth quarter versus the third quarter if we take out that non-recurring cost?

Michael Levitz -- Chief Financial Officer

To answer your first question, the $12.6 million is all included in G&A. In terms of the cost structure of the company and what we're guiding to, we do expect OpEx to increase. As I said, the reason we were more favorable in the third quarter was really a matter of timing between the third and fourth quarter.

So, we do expect OpEx to increase in the fourth quarter. That said, we reiterated our guidance for the operating margin for the year and honestly, we're thrilled to be delivering on our commitment to be EBIT-positive for the year and now net-income positive as well on the trajectory. So, really pleased with that and I think it positions us very well going into 2019.

Jayson Bedford -- Raymond James -- Analyst

Thanks.

Operator

Thank you. Our next question comes from Robbie Marcus from J.P. Morgan. Your line is open.

Robert Marcus -- J.P. Morgan -- Analyst

Great. Thanks for taking my question. Pat and Shacey, congrats on next steps as well. I don't want to minimize the US results, they were really good in the quarter, but I went back through the model and this was the first time since we kept track, at least in early 2015, where you didn't deliver US results above the top-end of your guidance range. Maybe help us understand some of the one-time items in the quarter and maybe what happened versus when you were setting guidance versus what played out.

Michael Levitz -- Chief Financial Officer

Robbie, I'll speak to it. Shacey can speak to our install base. Our install base is growing faster than what we expected. It really is a matter of mix and it's also a matter of -- well, first of all, it was timing as I said between Q3 and Q4, but it was also a matter of mix. We're really seeing the start of acceleration of our pay as you go model, as we described in the pharmacy. What that does is even preceding Dash, we've been moving more and more business to the pharmacy. You get less upfront revenue.

We're having record new patient starts, but we're getting less contribution from those in the quarter. So, we're doing better than we had expected in terms of the actual install base growth, but the mix of where that growth is coming from, honestly, the pickup in this pay as you go model is faster than what we expected.

Patrick Sullivan -- Chairman and Chief Executive Officer

That's a good thing.

Michael Levitz -- Chief Financial Officer

It's a very good thing.

Robert Marcus -- J.P. Morgan -- Analyst

Can you help us frame maybe what percentage in the pharmacy or what the pricing is versus pharmacy versus the prior business or maybe if you don't want to do that, just frame that you had the business on the former platform, what the dollar headwind in third quarter was and what it will be in fourth quarter as well?

Michael Levitz -- Chief Financial Officer

If we didn't have the timing issues, we didn't have the mix, we would have been at the top end or above, which makes sense given what we said on the install base growth. Install base growth is at the high-end of what we expected. So, it really is a matter of what I just described.

Robert Marcus -- J.P. Morgan -- Analyst

Okay. Great. Maybe just one quick follow-up on Horizon. That's really great news it will be controlled by the phone, but you do have two other competitors out there with hybrid closed-loop pumps, Medtronic potentially out early 2020 with their next gen and other products. How do we think about Omnipod over the next two years competing against some of the competitors?

Shacey Petrovic -- President and Chief Operating Officer

I'll take that one, Robbie. I guess I'll make the point that I always make, which is we're not really competing directly with Tandem or Medtronic. Their innovation that has occurred to date ahs certainly not slowed us down. I think as everyone has mentioned, this has been another record quarter for us despite innovation in the marketplace. It's a really large, fast-growing market with significant unmet need.

I've never really believed that anybody has to lose for us to win. We're focused on in the United States a million MDI users and in this segment, we just know Omnipod is attractive and it's a preferred product. Certainly, the market is going to get more dynamic. It has over the last few years and we're growing just fine and excited to continue that trend.

Operator

Thank you. Our next question comes from Danielle Antalffy from Leerink Partners. Your line is now open.

Danielle Antalffy -- Leerink Partners -- Managing Director

Hey, good afternoon, guys. Thanks so much. Congrats to you both, Pat and Shacey. Pat, we will miss you, but I'm confident Shacey will continue to drive positive shareholder returns for the company and the shareholders, so excited for the next steps here.

I know it's very early days, but you guys did get the approval for the type 2 pump with Lily. Just curious anecdotally what you're seeing, sort of what patients -- how patients are using it, if patients are staying on it, things like that, any sort of color you can give on the type 2 launch in Europe.

Shacey Petrovic -- President and Chief Operating Officer

So, Danielle, you are very well-researched but a slight mistake. So, we did get CE marks for Dash in Europe. So, we are still just -- in fact, we haven't even publicized that because we're still working through our launch plans and we do have some work to do in translations, etc. That's what that was. We are still working with Lily to get U500 over the finish line in terms of the submission there and making good progress on U200.

I think obviously, we are still focused on the insulin-intensive type 2 patients and concentrate insulins can help us address that patient segment. But actually, what we're seeing, which is, to me, really interesting is that Dash is testing extraordinarily well with that segment. It's actually a pretty fast-growing segment of our user base in the United States. Phone control might be arguably just as, if not more, meaningful in terms of unlocking the type 2 population.

We feel really good, even while we wait for concentrate insulins and Lily to get done, we feel really good about our ability to unlock growth in the type 2 population.

Danielle Antalffy -- Leerink Partners -- Managing Director

Okay. Sorry about that mistake there.

Shacey Petrovic -- President and Chief Operating Officer

No problem.

Danielle Antalffy -- Leerink Partners -- Managing Director

Just one quick follow-up for me -- just in general as you look at your install base in the US, one of the potential needle-movers longer term to growth was possibly attrition. You guys have done a great job of stabilizing that and now with Dash. Do you think you can start to move the needle on the attrition rate because that could be very incremental to sales growth?

Shacey Petrovic -- President and Chief Operating Officer

Yeah. I think the real challenge that we have in terms of understanding what is making an impact on attrition -- we've got good visibility to attrition of new patient starts. But as the base grows and more customers go through various different channels, we have less visibility.

The great thing that Dash will give us is visibility to what's happening in those patient groups and then a better assessment of what we can do to move the needle on attrition. But the great news is patient retention is very solid. It has not moved. We're in really good shape there, but I do think Dash presents an opportunity as we look over the next few years.

Operator

Thank you. Our next question comes from Chris Pasquale from Guggenheim. Your line is now open.

Chris Pasquale -- Guggenheim Securities -- Analyst

Thanks. I wanted to start with a follow-up on the Dash economics to make sure we're thinking about this correctly. When you say it's revenue-neutral in year one, that suggests to me that the higher price of a year's worth of Pods is making up for the loss of that upfront PDM revenue. That would imply that revenue per patient in years two and three should actually be higher since you're still going to be getting that higher pod price. Is that right?

Shacey Petrovic -- President and Chief Operating Officer

It's right, except I just want to, I guess, moderate the value. What we're also seeing is patients that are going to be migrating over who we wouldn't normally have sold a PDM to. So, when we think about it being revenue neutral in a year, we're thinking about all of that activity being neutral in a given year. I don't want you to attach too high of a premium to pricing in the pharmacy.

Chris Pasquale -- Guggenheim Securities -- Analyst

Okay. That's helpful. Thank you. Then on the drug delivery business, that's actually been more resilient this year than we thought so far, but the Street is expecting your last sales to be under pressure from here. It also looks like OnPro penetration may be starting to flatten out a bit. Can you share any preliminary thoughts on how you're thinking about that business in 2019?

Shacey Petrovic -- President and Chief Operating Officer

I guess the short answer is we don't expect drug delivery to be any more of a headwind in 2019 as it is in 2018. It's just becoming a smaller part of our business. Because of the rapid growth on the diabetes side, it just becomes a little less meaningful.

Chris Pasquale -- Guggenheim Securities -- Analyst

All right. Thank you.

Operator

Thank you. Our next question comes from Doug Schenkel from Cowen. Your line is open.

Ryan Blicker -- Cowen and Company -- Analyst

Hi, this is Ryan on for Doug. Thanks for taking my questions. You discussed that the ramping of your new manufacturing facilities expected to represent the headwind in gross margin next year. Can you quantify at all how we should be thinking about that? is this new 67% to 68% a good baseline for the company moving forward or could there be some pressure earlier in the year?

Michael Levitz -- Chief Financial Officer

This is Mike. Yes, there will be pressure, just purely because of the accounting as you ramp up a plant. So, you have to put your period costs into the P&L and there are just normal ramp up costs. So, we don't expect that our gross margin is going to improve on a full-year basis next year than it is at this point. That's really not because the ongoing run rate. It's really a matter of the inefficiencies in ramping up the new plant.

Ryan Blicker -- Cowen and Company -- Analyst

Got it. Then Shacey, you noted the Tidepool Loop algorithm could offer a potentially faster path to market than Horizon. I was under the impression that the Loop approval could take a bit longer, given how early stage that seems, at least from the FDA process. When do you think that can reasonably get approved? Thank you.

Shacey Petrovic -- President and Chief Operating Officer

You're welcome. I don't really want to comment on specifics because it is technically Tidepool's program and so, I'll let them do that as they make progress. The reason why we predict it could be potentially an accelerated pathway and that's just a potential is that the Loop product is an existing product that's being used by a few thousand people. It's already gathering data. They may have faster pathways to actually use real world data to support their approvals and the product is also already a working product. So, those things potentially offer some acceleration.

Operator

Thank you. Our next question comes from Ravi Misra from Berenberg Capital. Your line is open.

Ravi Misra -- Berenberg Capital Markets -- Analyst

Hi, thank you for taking the questions. Good luck, Pat. So, just one on the P&L -- regarding your gross margin long-term targets, you said it's going to be led by improvement in operations and manufacturing. How do we think of how to layer in Horizon when that does come? It sounds like you'd be getting the Dash device completely. So, what kind of tailwind would that represent to margin? Then I have a follow-up. Thank you.

Michael Levitz -- Chief Financial Officer

This is Mike. We were really pleased this quarter to be able to deliver out of our existing operations over 67% gross margins, which was really unheard of not that long ago. That position does very well for purpose target of 70% in 2021. We expect opportunities to expand our gross margins following that.

In terms of a particular product launch, it's definitely going to be helpful to not have a PDM cost in the mix with phone control. But there are a lot of drivers -- US manufacturing is a driver, leverage is a driver. There are a number of drivers for the gross margin expansion and I wouldn't single out any one particular product as being overly meaningful to that.

Ravi Misra -- Berenberg Capital Markets -- Analyst

Great. Thanks. My follow-up is I wanted to probe a little bit deeper on the non-cash severance charges. Was that a one-time event in the quarter or was that a full forward? I'm just trying to think of what would be the new base here. Thank you.

Michael Levitz -- Chief Financial Officer

So, the majority of that was a non-cash charge of acceleration of stock comp. Then the rest of it was a cash severance charge and our normal severance policy. So, it was -- I guess arguably the non-cash charge for the stock comp acceleration is somewhat of a pull forward, but yeah, it's all contained within the third quarter and G&A.

Operator

Thank you. Our next question comes from JP. McKim from Piper Jaffray. Your line is open.

JP McKim -- Piper Jaffray -- Analyst

Hi, thank you for taking the question. I echo all the congratulations. I want to just ask on Medicare Part D, getting coverage -- if I heard it correctly, you're at one-third as of today and I was trying to figure out what your goal is internally by the end of this year and how should -- how do you view the ramp in Medicare this year and whether getting the other two-thirds on there, how important that is to accelerating that.

Shacey Petrovic -- President and Chief Operating Officer

Sure, JP Ultimately, our goal was to establish broad Medicare access. So, while we may have gone about it in a slightly different way, we now have broad Medicare access. I think just to give some context around that, there's always this natural tension between maintaining price integrity and expanding market access.

So, because we had seen just really good success with the exception process and because we know that Omnipod users each year can select a plan that can provide them the best coverage, we opted not to compromise more on price than we thought absolutely necessarily. So, actually, on balance, we are extremely pleased with where we landed. I wouldn't expect, actually, coverage to ramp materially in 2019.

But we don't believe we're going to be materially limited for Omnipod users, Medicare beneficiaries to adopt Omnipod. So, that's kind of where we landed. We actually are really -- I think the team did a really smart job executing the strategy and we're in a really good spot.

JP McKim -- Piper Jaffray -- Analyst

Okay. So, you're saying they can just use the exception instead of getting the full coverage.

Shacey Petrovic -- President and Chief Operating Officer

Well, just to clarify that -- right now, every year, a user signs up for a new Medicare plan. The first thing a user can do is go select a plan that covers Omnipod. That's probably the first avenue. If for some reason they don't want to do that, they can pursue the exception process.

Operator

Thank you. Our next question comes from Kyle Rose from Canaccord. Your line is open.

Kyle Rose -- Canaccord Genuity Inc. -- Analyst

Thank you very much for taking the questions and congrats to both Pat and Shacey. I wanted to talk about Horizon. Shacey, you mentioned a fourth IDE trial. Can you just walk us through what that trial looks like? Is there anything different in the trial design or is that just simply you're actually going to be using the phone control before you move to the pivotal?

Shacey Petrovic -- President and Chief Operating Officer

Yeah. So, we opted to do IDE4 to get really just more real-world data under real world conditions across all ages with specific challenges like exercise, like large meals or skipped meals. That's really the goal there. Then because we had that time, we are pursuing phone control. Then we will -- for phone control specifically, we'll have human factors requirements, but IDE4 is about 20 to 30 people looking specifically at those real world more challenging scenarios.

Kyle Rose -- Canaccord Genuity Inc. -- Analyst

Great. Just one follow-up on the Tidepool announcement -- obviously, very interesting, just wanted to see why is that the right partner to go with right now. Is it fair to think we'll see future partners emerge in the future? I guess type zero is a big player in the space. I'm just kind of wondering if you're going to go with a partner, why not go with somebody you have an established relationship with?

Shacey Petrovic -- President and Chief Operating Officer

I think that's the benefit of interoperability and frankly, the benefit of our Dash platform is that we can be interoperable with multiple algorithms and multiple sensors. So, TypeZero is a great possibility for that. We liked Tidepool because it's a community that's already using the system. There are, I guess, almost 2,000 people out there that are using a hacked Medtronic pump and a Dexcom sensor and downloading this app.

We thought it was a great opportunity to be able to work with them to get the Pods studied and cleared in this system that's already being used out there and because it was iPhone control and just a great way to support the DIY community. That's why we're doing that. It's a great little program. It is primarily Tidepool's program that we're integrating into.

Operator

Thank you. Our next question comes from Raj Denhoy from Jefferies. Your line is open.

Raj Denhoy -- Jefferies -- Analyst

Good afternoon. This is a bit of a follow-up to that last question, but I'm curious to know on Dash in its current form, it doesn't seem to have the capability to have CGM data displayed. I'm curious how long it would take or if that's part of the plan over the near-term to get CGM onto that display.

Shacey Petrovic -- President and Chief Operating Officer

Yeah, Raj, we made the distinct choice to do integration on a user's iPhone. So, we don't plan to integrate EGM data on Dash. We did that because mainly users told us that's what they wanted, but also because a user can use whatever sensor on their iPhone and see that data. We have a great, I think, mechanism with Dexcom, where we use the Today widget screen, so they can get their data for their Dexcom and their Omnipod right on their iPhone.

That's where the integration is taking place as opposed to on the device. We always had planned to migrate everything to the phone and so that was along with the step of secondary display on the iPhone, we wanted to get the CGM data and Pod data there in one snapshot as well.

Operator

Thank you. That does conclude our question and answer session for today's conference. I'd now like to turn the conference over to Patrick Sullivan for any closing remarks.

Patrick Sullivan -- Chairman and Chief Executive Officer

Thank you, Operator. We had a terrific Q3. We had solid revenue results of over $151 million, continued our momentum of impressive growth with gross margin expansion of 67%, remain on track to deliver Insulet's first year of positive operating income. This was probably my best conference call out of 60. I'm confident and excited about insulates future and the significant contributions the company will make for people living with diabetes.

As we close, I'd like to congratulate Shacey on her well-deserved promotion to CEO at the end of this year. With her at the helm, the company will be in great hands with an extremely bright future ahead of it. It's been a great run at Insulet. I look forward to a lot of fun in retirement. My very best wishes to all of you. Operator, I'll drop the mic and you can drop the curtain. Thank you for joining today's call.

Operator

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

Duration: 62 minutes

Call participants:

Deborah Gordon -- Vice President of Investor Relations and Corporate Communications 

Patrick Sullivan -- Chairman and Chief Executive Officer

Michael Levitz -- Chief Financial Officer

Shacey Petrovic -- President and Chief Operating Officer

Joanne Wuensch -- BMO Capital Markets -- Analyst

David Lewis -- Morgan Stanley -- Managing Director

Margaret Kaczor -- William Blair & Co. -- Analyst

Jeffrey Johnson -- Robert W. Baird & Co. -- Analyst

Jayson Bedford -- Raymond James -- Analyst

Robert Marcus -- J.P. Morgan -- Analyst

Danielle Antalffy -- Leerink Partners -- Managing Director

Chris Pasquale -- Guggenheim Securities -- Analyst

Ryan Blicker -- Cowen and Company -- Analyst

Ravi Misra -- Berenberg Capital Markets -- Analyst

JP McKim -- Piper Jaffray -- Analyst

Kyle Rose -- Canaccord Genuity Inc. -- Analyst

Raj Denhoy -- Jefferies -- Analyst

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