Insulet Corp

NASDAQ:PODD

Earnings Call Transcript 2020-Q1

[Operator]

Good afternoon, ladies and gentlemen, and welcome to the Insulet Corporation's First Quarter 2020 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.

I would now like to turn the conference over to your host, Deborah Gordon, Vice President of Investor Relations.

[Deborah Gordon, VP, IR and Corporate Communications]

Thank you, and good afternoon, everyone. And thank you for joining us for Insulet's First Quarter 2020 Earnings Call. Joining me are Shacey Petrovic, president and Chief Executive Officer and Wayde McMillan, Executive Vice President and Chief Financial Officer.

The replay of this call will be archived on our website and the press release discussing our first quarter 2020 results and second quarter and full year 2020 guidance is also available in the IR section of our website.

Before we begin, I would like to inform you that certain statements made by Insulet during the course of this call may be forward-looking and could materially differ from current expectations. We ask that you please refer to the cautionary statements contained in our SEC filings for a detailed explanation of the inherent limitations of such forward-looking statements.

We will 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. We have transitioned to these measures as they align with what management uses as supplemental measures in assessing our operating performance and we believe that they are helpful to investors, analysts and other interested parties as a measure of our comparative operating performance from period-to-period.

Also, unless otherwise stated, all financial commentary regarding dollar and percentage changes will be on a year-over-year basis and all revenue growth rates will be on a constant currency basis.

And with that, I'll turn the call over to Shacey.

[Shacey Petrovic, President and Chief Executive Officer]

Thanks, Deb. Good afternoon, everyone, and thank you for joining us today. The last few months have posed extraordinary challenges for countries and communities around the world as we've grappled with the impact of COVID-19. Our hearts go out to those whose health has been affected and our gratitude goes out to the many medical professionals and first responders on the front-lines. We also hope that all of you joining us on today's call are staying safe and healthy.

As a company committed to improving the lives of people with diabetes, the safety and well-being of our Insulet employees and the communities and Podders we serve, have been our top priorities as we navigate these difficult circumstances.

In March, we transitioned to remote work arrangements for the vast majority of employees, in line with guidance issued by the WHO, CDC, local governments and health authorities. For those employees performing critical on-site functions, we significantly enhanced safety procedures to include social distancing, PPE protocols, frequent deep cleaning of our facilities and temperature monitoring.

I am pleased to report that this transition has been essentially seamless and on behalf of our leadership team, I'd like to express our sincere gratitude to the employees who are continuing to work on-site to ensure we can provide uninterrupted supply of Omnipod to our customers. I am incredibly proud of our global teams’ resilience and compassion in the face of this challenge.

While balancing many other demands like working from home, caring for children and keeping their families and friends healthy, our dedicated employees have never lost focus on our mission. Our Insulet team is what makes us such a great company and I want to thank each and every one of our employees across the globe.

I'd also like to thank our many supply chain partners for supporting our ability to build excess capacity and redundancy to ensure we can serve our customers without interruption and without delay.

Notwithstanding the difficult external environment that began to affect our international business in February and U.S. market in March, we achieved first quarter revenue of almost $200 million, representing a 25% increase, driven by 34% revenue growth in our total diabetes product line.

This performance is a testament to both our execution and the strength of our recurring revenue business model. We were well positioned coming into the crisis having ended 2019 in a position of strength with healthy inventory levels, a strong balance sheet, robust global manufacturing operations and plans to capitalize on our growth prospects.

We started 2020 with global Omnipod revenue near all-time highs and in the first quarter, we made continued progress on our strategic imperatives. In the face of new obstacles, we’ve responded quickly and effectively, maintaining our focus on execution and we delivered financial results exceeding our expectations.

While the impacts of COVID are difficult to predict, after a careful consideration and scenario planning, we have decided to maintain our annual guidance, although, we expect to come in at the low-end of the range we previously provided. Our unique business model is a key differentiator, since we generate the vast majority of our revenue from our large existing customer base.

Therefore, while the current environment is unusually challenging, we believe our 2019 and Q1 2020 momentum will provide insulation. This gives us confidence that even in the face of this [Indiscernible] revenue at the mid-teens rate in 2020.

Wayde will provide more detail. But assuming market dynamics normalize early next year, we also believe we can maintain our $1 billion revenue goal for 2021.

Importantly, our relative strength in the near-term allows us to continue to invest in our strategic imperatives that will drive growth over the longer-term. These investments will ensure that over the coming years, Insulet makes significant strides to improve the lives of people with diabetes. We will bring the simplest, most consumer-friendly technology to market.

Our business model innovation will ensure cost-effective access to the broadest population of users across the globe and our investment in operational excellence will ensure supply chain resiliency, world-class manufacturing capabilities, and industry-leading gross margins.

There is much work to be done to realize our vision and in 2020, we will continue to make significant progress. This year, we are focused on driving four key initiatives forward. One, deliver consumer-focused innovation; two, ensure the best global customer experience; three, expand our global footprint; and four, drive operational excellence across the organization.

Our team has done a remarkable job quickly adjusting in the face of COVID-19 and despite the challenges of working remotely, we do not expect an impact of more than a couple of quarters on our execution timelines. Engineers are finding creative ways to innovate in their newly virtual teams, sales calls are happening via Webex and our manufacturing and supply teams are ensuring we meet our growing customer demand without missing a beat.

I'll now walk through our Q1 progress on each of these key initiatives, starting with delivering a consumer-focused innovation. During the first quarter, we continued to grow the number of Omnipod DASH users, driven by both the intuitive simplicity of its platform and our unique pay-as-you-go business model through the pharmacy channel.

By eliminating complexity and restrictions, we are making Omnipod more accessible to a broader range of customers. Omnipod is differentiated, particularly in a down economy because it has no upfront cost.

This is also helpful to Insulet, creating a high degree of insulation through our recurring revenue durable annuity model. In this first quarter, we continued to increase coverage for Omnipod DASH, which helped grow the number of customers accessing Omnipod DASH through the pharmacy.

As of the end of Q1, we had secured Omnipod coverage in the United States for over 50% of Medicare and approximately 70% of Medicaid beneficiaries. And we've seen a notable tick-up in commercial coverage for DASH, with DASH now covered for over 60% of commercially insured lives.

In the first quarter, approximately one-third of our U.S. new Omnipod starts were Type 2, primarily Omnipod DASH through the pharmacy channel. As a result of this strong growth and expanding market access, our U.S. new Omnipod starts represented another record Q1.

With last year's launch of Omnipod DASH, we created our online training program for DASH customers transitioning from Omnipod. This enables users to get started via online training without the need to leave home or meet with a clinician for support. Thanks to DASH's simplicity. This web-based training has been a success and today, it is being used extensively to support thousands of users.

And in fact, many users transitioning from Omnipod to DASH just rely on the intuitive user interface, which provides step-by-step instructions to get started. These tools were created to support effective scaling of our business and have proven to be exceptionally helpful in our current environment.

In addition, in response to the pandemic, our team worked quickly to expand and enhance our program to include virtual training for new users that still want support from a clinician. The virtual training and support capabilities we have built across our global business have allowed us to successfully service existing customers and to onboard new customers, even those that are brand-new to pump therapy.

In fact, over the last several weeks in our direct markets, which represent about half of our business, we have on-boarded approximately 2,000 new users via virtual training with Insulet clinical trainers. And about 80% of these were MDI users new to pump and pod therapy. We have also seen our distributors and intermediaries implement great virtual training programs.

Last week, I personally observed one of these trainings via Webex and it was a remarkable experience. Our Clinical Training Manager walked a Podder, 7-year-old Colton and his parents through the setup and pod activation of Omnipod DASH. They were transitioning from multiple daily injections.

The training was thorough, effective, and the family was clearly at ease receiving it in the comfort of their own home and it was absolutely wonderful to see the delight on Colton's and his mom's faces when they learned about DASH's food library and temp basal capabilities, and when they experienced putting on their very first pod. It was a clear reminder of just how simple and accessible Omnipod is.

We have made great strides in delivering a best-in-class customer experience. We are constantly making it easier for users to try Omnipod and access it from a convenient pharmacy. We had much of this work underway in order to support our rapid growth and our goal to deliver the best global customer experience.

Telemedicine, virtual training tools and the convenience of pharmacy access will continue to deliver appealing, scalable customer experiences.

While we remain encouraged by the momentum of Omnipod DASH, we have seen a slowdown of new Omnipod starts globally. This intensified in March, as many people delayed non emergency doctor visits due to COVID-19 and we expect to face the strongest new start headwinds in the second quarter.

It is obviously difficult to predict the timing and extent to which COVID will impact our business. We don't know how long our customers will be challenged meeting with their physicians or precisely how much our telehealth capabilities will offset this impact.

Our guidance assumes the pandemic's recessionary headwinds will persist throughout 2020, followed by a gradual recovery starting in the third quarter, as economies begin to reopen and physician and patient interactions begin to normalize. We are presently assuming market dynamics return to normal starting in 2021.

In addition to ensuring the safety of our employees and continuity of supply to our Podders, our team has found ways to give back to our communities. We have participated in PPE donation programs to local healthcare facilities and gifted computer equipment to support remote schooling needs in our communities.

And I am particularly proud that in response to the significant economic impact of COVID-19, we have broadened our financial assistance program to ensure those who rely on Omnipod can remain on product if they lose insurance coverage.

This is a robust program designed to help address the unique healthcare affordability challenges for U.S. Omnipod users, who lose coverage due to COVID-19 and are not covered by Medicare or Medicaid. For these users, we will provide up to six months of pods at zero cost through the end of 2020.

Throughout the first quarter, we continued our work to develop our next-generation product, Omnipod powered by Horizon. We remain highly confident that Omnipod Horizon, the first tubeless, personal, smartphone-controlled automated insulin delivery system will be a game changer for people living with diabetes.

As you know, we paused the Horizon trial at the beginning of March in order to address a software anomaly. I am pleased to report that we have successfully completed the software update and has been sent to the FDA for review. Given anticipated agency review times and newly required logistics at our trial sites, we are now tracking to bring Omnipod Horizon to the U.S. market in the first half of 2021.

We are fortunate to benefit from the enthusiastic support of our trial sites and participants and expect that all sites and virtually all patients will continue in the trial.

That said, COVID-19 presents some challenges to how we support and monitor the trial and this likely will add a few months to our timelines. The team has reacted quickly, proposing updated protocols to the FDA to ensure virtual follow-up and support and our interactions with the agency continue to be collaborative and helpful.

We look forward to resuming the trial and we know our study participants are eagerly awaiting the benefits of simple, automated insulin delivery provided by Omnipod Horizon.

In addition to our progress with Omnipod Horizon, the team has continued to advance our collaborations with Dexcom, Abbott and Tidepool. Over the coming years, these partnerships will bring exciting new products to market that will deliver reduced burden and improved outcomes for people living with insulin-dependent diabetes.

We also continued to advance our existing platforms to bring even more value to our customers. This year, we will build-out Omnipod DASH with various new languages to further expand globally and we will deliver DASH with remote upgrade capabilities, including secure cloud-to-cloud integration through Glooko, enabling additional ease of use and telemedicine capabilities. And development work is underway on mobile phone platform extensions for Omnipod Horizon such as iOS.

Now, turning to our global expansion. As a result of the progress we made capitalizing on our direct operations in Europe, we have strengthened our presence in many of our large underserved existing markets.

We entered into a limited commercial release of Omnipod DASH in three European markets at the end of 2019 and had planned to further roll out DASH in Europe and Canada and to enter five new international markets.

We are eager to expand into new geographies and DASH has been well received in the markets in which we've launched it. COVID-19, however, presents some uncertainty in terms of market readiness, training and preparedness of our teams and partners, as well as regulatory and market clearances.

We believe these dynamics delay our DASH and market expansion efforts into early 2021, as we work to ensure the markets are prepared for successful DASH launches and market expansions. These impacts are temporary and we continue to view global expansion as an exciting multiyear growth driver for Insulet.

Lastly, I will address our manufacturing innovation and ongoing efforts to drive global operational excellence. Several years ago, we began taking steps to strengthen our global supply chain. We focused on building redundancy with our U.S. manufacturing capabilities to supplement our capacity in China, as well as create redundancy throughout our entire global supply chain.

The importance of this effort was highlighted as we worked to maintain production continuity in the face of COVID-19, first in China, and then in the United States. I am very proud of the incredible work our team has done to ensure we are producing above planned product levels, while ensuring the safety and well-being of our global employees. We are laser-focused on making sure our customers receive continued uninterrupted access to Omnipod.

This pandemic is the challenge of our lifetimes, but we will emerge stronger and better for it. Already at Insulet, it is driving us to improve systems, enhance telemedicine capabilities and further strengthen our manufacturing operations and supply chain. Insulet is rising to this incredible challenge and there is no other team I would rather work with and rely on to see us through to the other side.

We remain focused on executing our strategy to continue creating value for shareholders. And we remain focused on our mission to improve the lives of people living with diabetes even in the most difficult of times.

I'll now turn the call over to Wayde.

[Wayde McMillan, EVP, Chief Financial Officer and Treasurer]

Thank you, Shacey. These are challenging times as we deal with the ongoing global health crisis, and I'd like to also say, thank you to the Insulet team, who has shown incredible adaptability, as we have all adjusted to a new mode of operating. And well wishes to all of those impacted by COVID-19.

We are certainly not immune to the headwinds created by the pandemic. However, as Shacey stated, we are fortunate to have a durable annuity model with the vast majority of revenue generated in any given quarter coming from our existing customer base.

The current global environment is disrupted, but it does not change the significant market opportunity we have and we remain well positioned for sustainable growth over the long-term. We are confident in our ability to continue creating significant value for our shareholders while advancing our mission to improve the lives of people with diabetes.

We achieved another strong quarter of financial and operating performance in Q1. The execution of our strategic imperatives is paying off and we continue to invest for growth. As a reminder, the revenue growth rates I will discuss on this call are on a constant currency basis.

In the first quarter of 2020, we delivered revenue growth of 25.3%, approximately $7 million above our quarterly guidance range. This strong growth was driven by our global diabetes business, which grew 34% and was $10.5 million above our guidance range.

We were able to achieve these results as our global operations and commercial teams did a tremendous job quickly adjusting to the constraints caused by COVID-19.

The operations team put measures in place early in the quarter, as we learned of challenges ramping back up our China manufacturing facility in January and the commercial team acted quickly later in March as regional lockdowns were implemented to switch to more telehealth activity.

As a result, we've been able to deliver product to customers without interruption and we are producing above historic levels with volume contribution from our new U.S. manufacturing plant, all while keeping a keen focus on ensuring the safety and well-being of our employees and delivering products to our customers.

By product line, U.S. Omnipod revenue grew 35.4%, $5.6 million above our guidance range and represented the highest growth rate we have achieved in our first quarter in over five years.

Our increasing customer base and growing adoption of Omnipod DASH, primarily through the pharmacy channel, continue to be the main drivers of outperformance, along with a mix benefit for the premium on Omnipod DASH.

In the quarter, we experienced an easing of the seasonal impact of Q1 deductible resets given our shift to the pharmacy and we also benefited from an estimated $4 million of end-customer stocking due to COVID-19.

As a reminder, we began generating revenue for DASH at the start of the second quarter of last year. So our 2020 first half growth rate will benefit from annualizing the first full year of Omnipod DASH and our move into the pharmacy.

In the first quarter, volume growth of Omnipod DASH drove over 60% of our U.S. new Omnipod starts and we grew U.S. volume through the pharmacy channel to almost 30% of our total.

International Omnipod revenue grew 31.9%, $5 million above our guidance range. International also benefited from an estimated $2 million of channel stocking orders due to COVID-19 late in the quarter.

Drug Delivery revenue declined 50% and was below our guidance range. This was due to a shift in timing of production, which you will see is reflected in the greater-than-normal revenue growth we expect from this product line in the second quarter.

Overall, we are pleased with our strong revenue growth in the first quarter and start to the year, despite beginning to see a slowdown in new Omnipod customers in March.

Turning to gross margin, we delivered 64.1% in the quarter, down 280 basis points year-over-year and flat sequentially, including a 160 basis point unfavorable impact from COVID-19-related costs, as well as a 40 basis point unfavorable impact from FX.

Also impacting gross margin was the continued impact of ramping production at our new U.S. manufacturing facility, with our second manufacturing line starting production in early March.

Partially offsetting the gross margin headwinds were the continued improvements through our global manufacturing and supply chain operations. We were well prepared for this difficult situation given our complete supply chain redundancy strategies implemented over the last several years.

The incremental 2020 costs we are incurring to maintain the safety of employees and the quality of our products and to ensure we produce ahead of demand is critically important during this time.

We are pleased to be producing sellable product on our second U.S. manufacturing line and as we've previously communicated, it means we will incur a headwind to gross margin as we ramp. With the recent shift in focus to COVID-19 safety and mitigation efforts, we are now assuming a slower ramp of our manufacturing lines. Once fully operational, our U.S. manufacturing facility and lower landed cost of goods will drive gross margin expansion over the long-term.

Operating expenses in the first quarter were 60% of revenue, compared to 62% in the prior year, in line with our expectations and we ended the quarter with adjusted EBITDA of 12.3%.

Regarding our cash and liquidity status, we are in a favorable cash position with no debt maturing until 2024 at the earliest and very low cash interest expense. At the end of the first quarter, we had $382 million in cash and investments, compared to $435 million at the end of last year.

This sequential decrease was primarily driven by our use of cash in order to invest for growth, including planned capital expenditures for our U.S. manufacturing and supply chain operations. As a result of the recent refinancing of our convertible debt, we have a favorable debt profile with no near-term maturities and no restrictive covenants.

In summary, we have the cash position and favorable financing structure we need to profitably grow our business.

Turning to our 2020 guidance. We are in an unprecedented time with the dynamic COVID-19 pandemic and the uncertainties it is creating. As we communicated in our earnings release, and as Shacey stated, we are maintaining our revenue guidance at the low end of our original total company range.

We have the benefit of the durability of our recurring revenue model, which provides the vast majority of our revenue from our existing customer base. Historically, new Omnipod starts within any given quarter contributed approximately 10% of revenue. It is difficult to accurately predict the progression of COVID-19 and the extent of the resulting depth or length of the disruption.

However, we want to provide you with the key metrics for our business and underlying assumptions as we track them during this time. We have developed a set of assumptions, based on what we have experienced through April and what we understand about the macro environment. If our base assumptions are either too high or too low, we are well prepared to manage through the multiple scenarios.

As noted, we are assuming that the most significant impact will be on new global Omnipod starts in the second quarter with gradual recovery throughout the second half of the year, assuming economies around the globe begin to reopen.

As a result of a reduction in new Omnipod starts in Q2 and an assumed continued headwind in the second half of the year, we expect a compounding effect on revenue growth to mostly impact the second half of the year.

As compared to our previous expectations at the start of the year, we are now assuming quarterly reductions in our global new Omnipod starts of approximately 50% to 75% in the second quarter, approximately 50% in the third quarter and approximately 25% in the fourth quarter.

We are also assuming some downward pressure on utilization and an uptick in attrition to account for expected recessionary headwinds. Given our no-charge PDMs and pay-as-you-go model in the pharmacy, we feel we are well positioned in the – if the market becomes more cost-sensitive.

This allows patients to adopt pod therapy for their diabetes management without the large upfront cost or the challenge of a four year lock-in period. We have also established a set of leading indicators and are monitoring our data more frequently to adjust to different scenarios as they play out in this challenging time.

For our total company 2020 revenue guidance, we now expect approximately 15% growth, which is at the low end of the range we've previously provided. By product-line, we have slightly adjusted guidance. We now expect total Omnipod revenue growth of approximately 18%, at the low end of our prior guide.

For U.S. Omnipod, we expect revenue growth of approximately 19%, near the low end of our prior guidance and for international Omnipod, we expect revenue growth of approximately 16%, which is below our prior guidance.

Lastly, for Drug Delivery, we expect to land in the middle of the range we previously provided of a 15% to 20% decline based on our partners' current forecasts.

Now turning to the rest of the P&L on a full year basis, for gross margin, we now expect the full year to be approximately 63%, compared to our prior expectation of approximately 65%. This factors in our forecasted reduction in volumes and related lower revenue forecast due to COVID-19, as well as an estimated $5 million to $10 million of additional one-time costs related to COVID-19 safety and mitigation efforts.

Also factored into our gross margin estimate is a slower ramp in our new U.S. manufacturing lines, as timing has been impacted by the shift in focus for the operations team to mitigate the risks related to pandemic safety, as well as supply chain continuity. And, to a lesser extent, the assumed cost of our enhanced financial assistance program.

Our 2020 and long-term financial strategy and capital deployment plan remain unchanged and we continue to expect capital expenditures to be consistent with prior year. We will continue to invest in our innovation pipeline, expand our global commercial initiatives and invest in U.S. manufacturing.

Lastly, we are reaffirming our expectation of adjusted EBITDA as a percentage of revenue in the mid-teens, now closer to the low end of the range. For 2021, as Shacey stated earlier, if our base assumptions hold for 2020 and we see market conditions stabilize in 2021, we will remain on track to deliver our revenue target of $1 billion.

For our 2021 gross margin target, as a result of the pandemic impact to volume and U.S. manufacturing ramp, we now expect a range of 67% to 70%. We still see a pathway to our original 70% target.

However, there are many scenarios that can play out. So we feel it's prudent to provide a wider range at this time. In no way does it change our confidence that we will achieve 70% gross margin over time.

Finally, we are reaffirming our expectation of 2021 operating income as a percentage of revenue in the mid-teens, now closer to the low-end of the range.

In summary, we started the year with higher-than-expected performance in Q1 and with our resilient business fundamentals and base assumptions, we believe Insulet is well positioned to sustain growth in 2020 and over the long-term. We remain focused on our strategic imperatives in delivering on our mission to improve the lives of people with diabetes around the globe.

In closing, our thoughts and prayers go out to everyone impacted at this time. We are proud of our Insulet employees that have responded to this challenging situation and how they remain focused on our mission.

With that, we'll turn the call over to the operator for Q&A.

[Operator]

Thank you. [Operator Instructions] And our first question is from Robbie Marcus of JPMorgan. Your line is open.

[Robert Marcus, JP Morgan]

Great. Thanks for taking the question. And congrats on a really nice quarter. We've – in our checks with endocrinologists, we consistently hear that, pumps are a little harder to train remotely than CGM, but Omnipod stands out as being easier than other competitive pumps to train remotely, plus the cost to access and the cost to use is significantly lower, which bodes well during what should be a pretty tough economic time the next few months or longer here.

So how are you thinking in terms – I know most of your new patient starts come from MDI. But how are you thinking about your competitive positioning here going forward, both to patients to basically pay up before a pump, but also versus your competitors, where you might have a lot of benefits versus them? Thanks.

[Shacey Petrovic, President and Chief Executive Officer]

Thanks, Robbie. Yes, I think you are right. Your data supports what we see, which is that we are – there are all sorts of things that make Omnipod a really appealing insulin delivery therapy for patients. And some of those things are even more powerful in an environment like the one we are in.

When you think about the move towards a more cost-conscious consumer in this really challenging economic environment, obviously, the fact that you don't have to pay upfront for Omnipod and you are not locked in to four years of therapy, those things are very appealing. But I think probably even more powerful than that is the simplicity of the platform.

And in some ways, telehealth just plays really perfectly into our strategy, because our whole goal is to bring the simplest, most consumer-friendly technology to market and if you think about what you need to be able to transition people in a telehealth environment, from multiple daily injections to a new technology, it's got to be simple.

And we've developed a technology that is simple enough for kids, simple enough for multiple daily injection users and one that really, if you think about it, has two components, no needles to handle, no infusion sets. So it's just a very simple technology to train on. And I think that differentiator is going to become more powerful in the environment that we are in today.

So, we feel good about this trend and I personally am really excited by the capabilities that we've built and expanded on in a really short period of time to be able to lean in during this time and really bring our technology to more people who need it.

[Robert Marcus, JP Morgan]

Great. Maybe just as a quick follow-up, Insulet stands out as having a lot of China manufacturing exposure. You touched on this a bit in the prepared remarks and you have done a great job ramping up with the new manufacturing facility. I believe, line one is up. Line two is on its way and line three is being built.

But how should we think about when you'll have much more dependence on the U.S. manufacturing versus outside the U.S. in case this lasts for much longer?

[Wayde McMillan, EVP, Chief Financial Officer and Treasurer]

Hi, Robbie, it's Wayde. I can take that one. And the team saw this risk several years ago when they laid out the multi-year strategy and obviously made a significant investment. I know you've seen it here as well.

And to your point, that's giving a lot of tailwinds to the team here during this current challenge that we've got two lines up and running now and producing and that's allowing us to actually build inventory through this time and so being able to stay ahead of demand and demand that's overachieving or outperforming our base scenarios.

Regarding the risk in China, I mean, we've got a really strong partner in China. I think we are very impressed by how quickly they took on the challenge and we are able to staff, recruit, onboard, train and safely move people into the facility and get our production up. It was clearly delayed from a typical year-end start.

But, given the environment, we were impressed by how quickly both the third-party team and our operations teams work together. I highlighted here some of the costs. We've put some incentives in place to help fund some of the work that our third-party manufacturer was doing and some of the extent they were going to get employees into the facility to get producing for us again after the New Year.

So, I think we're going to see a multi-facility strategy from us going forward. And one of the main drivers for our U.S. manufacturing facility was to get redundancy and we'll have redundancy once we have three and four lines running here in the U.S. and keeping our China manufacturing facilities. So we'll achieve that objective once we get our third line up and then eventually onto our fourth line. Next question, please?

[Operator]

Yes. Our next question coming from the line of David Lewis of Morgan Stanley. Your line is open.

[David Lewis, Morgan Stanley]

Good afternoon. A couple of quick ones for me. Wayde, I appreciate all the great detail on new patient start impacts across the quarter. I wonder, just given that certain geographies are beginning to open up, certain regions in the U.S. are beginning to open up and we are seeing this growing impact to telemedicine here in April as it leads into May.

That quantification that you gave us across the quarters, that’s sinking up as sort of the qualitative recovery you are seeing April into May? Or is it sort of slightly ahead or slightly behind?

[Wayde McMillan, EVP, Chief Financial Officer and Treasurer]

So, good afternoon, Dave. Yes, so – and thanks for bringing this one up, because we are hoping that we'd get an opportunity to give a little bit more context on it. Starting with the matching of our assumptions with the global economy and what we are starting to see in the macro environment with different countries and regions opening up. That's why we tied our base assumptions to this gradual improvement through the end of the year.

And clearly, we are expecting headwinds through the rest of the year. If it happens that regions open quicker and our customers and patients can get to meet with their physicians and get the therapies that they need to treat their disease sooner. We'll be ahead of those assumptions. But at this point, we're assuming that we'll continue to see these headwinds through the end of the year.

And to the second part of your question, how does that compare or contrast to what we've seen in April? I'll use this as an opportunity just to help explain to people the impact of our model and it really shows the durability of our model, because the impact to Q2 is not really impacted that much by new patient starts.

As I mentioned in the prepared remarks, approximately 10% of any quarter is due to new patient starts. And so, we're really benefiting from the strong second half of 2019 and strong performance into Q1. And what we've seen so far in April is, revenue continuing to perform well because we're benefiting from that momentum coming into Q2.

But behind that, we are seeing a slowdown in our new patient starts. And we really see that in two stages. We track our sales cycle in two main stages, sales leads and then actual new patient starts. So even in front of new patient starts, we are tracking our sales leads and that's where we saw a pretty acute drop-off in March.

And so, as that funnel coming into Q2 starts to get smaller, that's where we are seeing the impact and so that's going to impact May and June for the most part. So we are anticipating our new patient starts, although strong through April, will start to slow down here through May and June.

And then, it's our expectation that both given the ability for people to return to their endocrinologists and work on different strategies to improve their therapy, including pod therapy, we are assuming we'll gradually improve through the end of the year. And then, as Shacey highlighted, telehealth, we feel we are very well positioned.

Our teams were already working on telehealth initiatives, and we were training people virtually. But we have redoubled those efforts now in the face of this pandemic and we are doing, as Shacey said, thousands more and that's growing every day.

[David Lewis, Morgan Stanley]

Okay. Wayde. Thanks. That's super helpful. And then maybe, Shacey, just one quick one for you, kind of also tied to recovery. But in the ex U.S. impacts, your forecasting is a little heavier than U.S., which makes sense given the different sites of service or how this healthcare is delivered in those two geographies. But how would you characterize the visibility into the U.S. recovery relative to the ex U.S. recovery? Thanks so much and great job.

[Shacey Petrovic, President and Chief Executive Officer]

Thanks, David. Yes, you are right, on ex U.S., just the way that care is delivered there, obviously, many more people living with diabetes get trained on new technologies like Omnipod in the hospital setting, as opposed to the clinic setting.

And so, we do anticipate it'll take a little bit longer for some of those markets to return towards normalcy and the headwinds are a little bit more significant. That said, we do have telehealth activities going on and virtual trainings going on in every international market, just like we do in every U.S. territory. And so, I think that's just the nature of what we are dealing with in the U.S.

In terms of visibility, we have – we benefit in the U.S. from visibility to our direct customers and that helps give us a sense of what we can extrapolate across the markets. The same thing is true in Europe, although I think the insights into our direct patients aren't as easily extrapolated into additional markets.

So that's the challenge we have, is just how fragmented the European market is. But we work every day obviously with our partners and with our team to get those insights and as Wayde said, to be tracking those leading indicators, so that we can manage the business as effectively as we can during this time. Next question?

[Operator]

And our next question coming from the line of Joanne Wuensch with Citi.

[Joanne Wuensch, Citigroup]

Good afternoon everybody and thank you for taking the question. One of the things that I am trying to get my head around is the patient or the new patient adds that aren't happening right now. When do they come back? And how do they come back?

[Shacey Petrovic, President and Chief Executive Officer]

Yes. I think it's a good question, Joanne. It's difficult obviously to predict the future. What our data shows is, and I'll speak mainly to the U.S., because that's where we have really the best insight. But what our data demonstrates is that, in the United States, endocrinologist visits are down 60% since the beginning of March.

And of that remaining 40% that are still happening, 15% of those are being delivered via telemedicine. So a pretty significant drop-off. What we see is just a more and more adoption of telemedicine across the United States. So I think that'll help offset it. And I think one of our questions is, how durable is telemedicine, because it's obviously dependent in some ways on reimbursement.

But we do track state-by-state new patient starts and as Wayde said, our leads in those markets to see in some of these areas that were hit harder than others, are they starting to recuperate? And so we see indications of that across various markets and that's what we'll continue to track so that we can continue to forecast.

[Joanne Wuensch, Citigroup]

Thank you. And then my second question has to do with the international market, recognizing maybe it will be slower to open up new geographies. How do you think about approaching them? And does what's happening globally changed your view on what markets may be next or not? Thank you very much for taking the questions.

[Shacey Petrovic, President and Chief Executive Officer]

Thanks, Joanne. I don't think this impact today makes us feel differently about the new markets that we had planned to enter. Really, what's – what we are planning for is just to make sure that we have all of these markets prepared for successful launches. And so, in various markets, we might be, for example partnering with a strong distributor partner there.

We may be seeking market clearances or even regulatory approvals and we want to make sure that all of that stuff is in place before we launch into the market. And so that's really where we are – when we're thinking about different timelines and potentially early 2021 instead of 2020, it's really tied to making sure that we have everything prepared so that we can have successful launches.

Not that we are thinking about different territories at this point. There is a tremendous amount of opportunity, as I always say. We are really in a handful of countries relative to the rest of the world, and that's true even in Europe where we are starting to build a really strong presence there. There is still a tremendous amount of unmet need.

So we are going to attack that unmet need. It's just going to be a little bit later than we expected because of these dynamics.

[Operator]

And our next question coming from the line of Margaret Kaczor with William Blair. Your line is open.

[Malgorzata Kaczor, William Blair]

Hey, good afternoon guys. Thanks for taking the questions. First one for me, I guess, on the virtual training, I wanted to follow-up on that. I understand 15% of the 40% of patients or remaining were trained virtually. But as you look at that going forward, can you give us the advantages and disadvantages of that? For example, is it easier to get to a patient online or are there cheaper costs associated with that?

[Shacey Petrovic, President and Chief Executive Officer]

Sure. Yes. I think we're seeing a lot of advantages, frankly and not any disadvantages in terms of virtual training. I mean, I think there are always going to be some subset of patients who would prefer in a perfect world to be trained with a clinician or in a clinic.

But the feedback from patients on virtual training has been incredibly positive. People are describing it as simple. I can tell you from the one that I witnessed just on Friday that the patients were incredibly comfortable. The family was incredibly comfortable that we were able to get more insight into kind of how they operate by just seeing them at home.

And it was a very efficient, very effective training, so. and the feedback has been very positive. So I think this is a trend that will continue regardless of what happens with telemedicine. We are seeing a lot of positive feedback out of this. Our clinicians can be more efficient. Patients don't have to get into the clinic and the feedback has been very positive.

It's just so simple. You don't have a needle. You don't have – you have two components, and it's a really straightforward technology to walk a user through. So, it is ideally suited to virtual training.

[Malgorzata Kaczor, William Blair]

Okay. Great. That's very helpful. And then in terms of the patient leads and sales and marketing strategies in the interim, I've seen most of your patients at this point are coming from face-to-face visits with ENDOs and strategic discussions with ENDOs and so on.

But, are you going to change any of that strategy over the summer or kind of through year-end to maybe get patients through different channels like an online channel? Thanks.

[Shacey Petrovic, President and Chief Executive Officer]

Yes. Thanks, Margaret. I – first, I'll say that it's pretty remarkable to me that actually virtual sales calls are still happening with endocrinology offices and in many cases, ENDOs are really looking for information from us in terms of how we can support telehealth activities. I think earlier in February, we had a webinar focused on telemedicine with Omnipod and like 800 physicians attended that.

So there is a tremendous demand out there for this information and insight to how do you do this well, and we've got great resources to be able to support those discussions with ENDOs. So that isn't going away. But to your point, obviously, that's where the headwinds are coming from.

We have reallocated resources from a sales and marketing perspective, from things like conferences and travel and entertainment to a more digital outreach, direct-to-patients, to be able to engage them on: one, the benefits of Omnipod, and two, the fact that you can try it, risk-free and you can train all at home without needing to go into the clinic. And so it's early days, but we believe that message will resonate with patients.

[Operator]

And our next question coming from the line of Ryan Blicker of Cowen. Your line is open.

[Ryan Blicker, Cowen and Company]

Hi, thanks for taking my questions. Can you talk a little bit more about what to assume within your revised Horizon timelines? When are you assuming the trial restarts? And then, do you still expect to conduct a limited market release prior to a full launch in the U.S.? Or do you believe you could broadly launch Horizon in the U.S. upon FDA approval?

[Shacey Petrovic, President and Chief Executive Officer]

Thanks, Ryan. So we are anticipating just a little bit of time, a few weeks of FDA review for the submission to restart the trial. And then, we've got to retrain sites, et cetera on just the virtual protocols for follow-up and monitoring of patients. And so, we think that's going to take a little bit of time, probably sometime into June, I would guess, before we restart the trial.

And in terms of a limited market release, we will do a limited market release. It's best practice with any new technology to do a limited market release. We will do what we can to bring this technology as rapidly and through access and other methods to patients as quickly as possible because, we know there is a significant demand out there. But it is going to take us a little bit of time to get through the limited market release.

[Ryan Blicker, Cowen and Company]

Got it. Very helpful. And then I apologize if I missed this. But what proportion of the new patient starts in the U.S. were through the pharmacy in the quarter? And what proportion of your overall U.S. installed base is now going through the pharmacy? And do you believe the transition to the pharmacy could be accelerated at all in the U.S. due to COVID-19? Thank you.

[Shacey Petrovic, President and Chief Executive Officer]

I'll take maybe the pharmacy issues and then Wayde can talk about what percentage of our new starts. I am not sure if we gave that detail. But in terms of the overall base, we now have almost 30% of our U.S. customers going through the pharmacy.

And actually, when I think about how do we really scale this business, we've always been thinking about how do we help our customers get the best customer experience through self-service, through easier training, et cetera. And we've talked a lot about that. Our virtual training tools and our web-based training tools.

But the pharmacy is a big piece of this, too. This work was underway for us, because diabetes is an epidemic and endocrinology is in short supply. And so we need to innovate the business model to be able to ensure that we can meet this rapidly growing demand in this unmet need. And so, of course, all of the telemedicine stuff that we talked about is a piece of that.

But the other piece of that, if patients need care and potentially aren't in their physicians' offices frequently, the pharmacy could play a really exciting and really important role, because unlike your endocrinology office, there is a pharmacy on every corner and if we could leverage that channel to educate, inform, and support patients, that could be a much better customer experience.

And of course, it's a channel that we, right now, from an insulin delivery standpoint or insulin pump standpoint, own. And so, very – we see it as a worthy investment in a way to provide the best possible experience and the most cost-effective scaling commercially of our business.

[Wayde McMillan, EVP, Chief Financial Officer and Treasurer]

Hey, Ryan, it's Wayde. And just to add on there to round off your question. As Shacey said, our installed base in the pharmacy is at 30%. We didn't give exact pharmacy new patient starts. But DASH, we did and DASH is 60% of our new patient starts, almost all of those were through the pharmacy as well as type 2 has grown to be a third of our new patient starts and the majority of those are through the pharmacy as well.

So, DASH and type 2 are a big part of what's driving the volume growth now to the 30% going through the pharmacy.

[Shacey Petrovic, President and Chief Executive Officer]

It's great to see, too, just the progress we've made on establishing access through the pharmacy. It's a big piece of why we've been able to expand so much and in fact, just in the last month, we've even secured Cigna coverage in the pharmacy channel, which is – that's part of why we saw that tick-up in commercial coverage and part of what continues to drive adoption through the pharmacy channel.

[Operator]

And our next question coming from the line of Jeff Johnson of Baird. Your line is open.

[Jeffrey Johnson, Robert W. Baird & Co.]

Thank you. Good afternoon. Hey, Shacey, I wanted to follow-up maybe on the questions around new patient starts and the 50% to 75% decline in the second quarter and then the gating thereafter. Trying to triangulate that with your comments about the ease of use of prescribing through telehealth and that.

Do you think that 50% to 75% and then the third and fourth quarter numbers that you are giving, how do you feel like that compares maybe to the broader insulin pump market at this point? Are you guys doing better than? About the same as or worse than? Just given your comments on the ease of prescribing, I would think better than.

But just would love any kind of competitive intelligence you are hearing out in the field from your docs on what those numbers represent relative to market.

[Shacey Petrovic, President and Chief Executive Officer]

Yes. Sure, Jeff. I think I don't want to comment on kind of competitive pump businesses. But what we do know, just from IQVIA data and market – primary market research is that in the United States, ENDO visits are down 60% since the beginning of March. So I think that gives you a sense that this 50% to 75% number is probably right in line with what others are seeing.

And while we are, I would say, bullish on what kind of fit Omnipod is for telemedicine and we believe in that world we can lean in and do better than others. At the same time, we are relying on ENDOs to build telemedicine capabilities. So while we have kind of sped ahead and I think built some really exciting capabilities and support mechanisms for our ENDO offices, they are still across the globe.

Different clinics are in very different situations in terms of their capabilities to be able to support telemedicine. So, we're a little bit ahead of the curve, and we'll see how this plays out and how quickly ENDO offices across the globe, frankly, but particularly in the United States can start to implement and support telehealth for their patients.

[Operator]

Our next question coming from the line of Jayson Bedford of Raymond James. Your line is open.

[Matt Wizman, Raymond James]

This is Matt Wizman on for Jayson. I appreciate all the color and visibility you guys have been giving. It's much appreciated. My question is on the type 2s. So now that there is been a bit more time with kind of a more substantial amount of type 2s in the base, have you noticed any change in the utilization or attrition dynamics with these types of users?

And then also, could you speak to the broader type 2 reimbursement environment on the commercial front, especially given how – on the CGM front, some payers have been a bit more friendly? Thanks.

[Wayde McMillan, EVP, Chief Financial Officer and Treasurer]

Great. Hey, Matt. I can – this is Wayde. I can answer the first part of the question and then hand it to Shacey for the second part. So, we have not seen a material change as type 2s have become a bigger part of our mix of products. Our utilization has stayed pretty steady through Q1 and also through the first month of April.

And in fact, one of the things that was on our radar when we set our annual guidance at the beginning of the year and one of the things that we thought could have pushed us to the lower end of our original guide was attrition, because, we had done a lot of new things, a new channel, a new product, a new business model with the pay-as-you-go model.

And so, we left ourselves some room in the original guide that we could see attrition tick up. And what we experienced in Q1 is actually our attrition ticked down a little bit. We performed very well in the first quarter with slightly better attrition than we had seen historically. So we're very happy about that.

As I mentioned in my prepared remarks, though, as we head into this more recessionary-driven environment, we are adding a tick-up in attrition and a tick-down in utilization, just because we don't know what the recessionary environment holds for us and we are going to start there and put that stake in the ground and then we'll monitor it as we go from here.

[Shacey Petrovic, President and Chief Executive Officer]

It’s great, Wayde. And in terms of your second part of your question around reimbursement for the type 2 patients, one of the things we really like about the pharmacy channel is that there are – there isn't really a distinguishment between reimbursement for type 2 or type 1, if they require insulin. And so there are fewer restrictions.

It's a simpler channel to access your technology through and it really doesn't distinguish between type 1 or type 2, provided the patient is insulin-dependent and needs an insulin delivery mechanism. And then, of course, we always educate payers on the fact that Omnipod reduces total daily dose of insulin and provides very clear benefits for both patient segments.

And so, we've been fortunate to establish broad reimbursement through the pharmacy channel that doesn't distinguish between the two segments.

[Operator]

Our next question is coming from the line of Travis Steed of Bank of America. Your line is open.

[Travis Steed, BofA Merrill Lynch]

Congratulations on a strong Q1 and everything you're doing for patients. Wayde, I just wanted to make sure I fully understood the year-over-year reductions you gave in new patient starts. Were those reductions versus last year or versus your original guide?

And then, the change in the full year guide, it sounds like the majority of the change is coming from those new patient starts being lowered. I am just curious if there is any more color you could provide on what you are assuming on attrition and expansion of the patient support program.

[Wayde McMillan, EVP, Chief Financial Officer and Treasurer]

Yes. Hi, Travis. Thank you. So to the first part of the question on new patient starts, it is versus our guide and our previous expectations for 2020. And of course, those are estimates, right? We have really good visibility into Q2, as I mentioned, walking through the two-stage sales cycle there.

And really good visibility for Q2, obviously, in this environment, there is going to be more uncertainty for the second half and what that holds. But we thought it was important to just lay out these key metrics and put a stake in the ground, so that we can then help you understand the key drivers for our business here and then we can message to it as we go throughout the year.

As far as the full year guide goes, the key is new patient starts. We think that, that will be the most significant metric to watch for. If we just pull up and think about our business model, we have this advantage of a durable recurring revenue model. And so even when we see new patients get impacted like we did in March and the inability for our customers to get to the ENDO office, I mean, it's a really unique dynamic and with that, the momentum of our business carries.

And so we've got really strong growth rates in Q1. We're putting a strong guide in for Q2 and what we have to manage then is this compounding of new patient starts. So if we go through two or three quarters of restrained new patient starts, that's going to weigh on our growth rate, especially given the tough comps we had, because we performed so well at the end of last year. So when we annualize into that tough comp, we are going to have to manage through some lower growth rates in the second half.

But then, as expected, when we see our new patient starts start to build momentum through the end of the year again and then assuming when we get back to normal or a new normal, which is, as Shacey talked about earlier, may involve more telehealth, but we get back to a more new – a new normal where we're getting a regular cadence of new patient starts, then the momentum builds again and we start to drive our growth rates even higher.

So, we felt it was important to really lay out that new patient start dynamic. And then the other key metrics that I mentioned, utilization and attrition. We have ticked down utilization a little bit, attrition up a little bit. But the major driver here is new patient starts. So for that, we are going to watch it.

We are going to certainly benefit from the durability of this model here in the first half of the year. We are going to track these key metrics through the second half and then hopefully, we'll all move beyond this pandemic and get back to business here in 2021.

[Shacey Petrovic, President and Chief Executive Officer]

And Travis, I'll just comment on your question regarding the patient assistance program. We don't look at that as hitting revenue, because these are patients who would not be able to afford the product anyways. And so I'm really, really proud of this program.

I am proud of the fact that Insulet was out front and that we can help support patients who otherwise might not be able to access the product. But we didn't view that as a revenue headwind, because those patients would have probably had traded off the product because they can't afford it.

[Wayde McMillan, EVP, Chief Financial Officer and Treasurer]

Okay. Operator, we are over time. But why don't we try to get through at least one, maybe two more, please?

[Operator]

Our next question, coming from the line of Matt O'Brien of Piper Sandler. Your line is open.

[Andrew Stafford, Piper Sandler & Co.]

Hi guys. This is Drew on for Matt. Thank you for taking the question here. I wanted to start off a little bit on your sales channels a little bit. I believe you said about 30% of your volume was due to the pharmacy. Appreciate that color. And definitely should help you in this type of environment.

But I guess, diving in on the other 70% of the business, are there any barriers presented by this epidemic outside of patient willingness, that kind of thing that could limit the patient access through the DME, be it’s availability, people not being able to process paper work, anything like that?

[Shacey Petrovic, President and Chief Executive Officer]

I think one of the challenges in the DME channel is the limitation of access for people living with type 2 diabetes. So that's one area where we likely will not see access or availability. And then, I am not sure about the others. We haven't really seen trends that would indicate that there is a particular challenge with the DME environment that isn't being experienced in the pharmacy channel with the exception of type 2 access.

[Wayde McMillan, EVP, Chief Financial Officer and Treasurer]

Next question, please?

[Operator]

Our next question coming from the line of Kyle Rose of Canaccord. Your line is open.

[Kyle Rose, Canaccord Genuity]

Great. Thank you very much for taking the questions and congrats on a strong quarter. Two questions for me. One is, the delays on new patient starts and kind of the assumptions you are seeing in guidance, I appreciate the commentary around the decline in ENDO visits. But maybe just help us understand maybe the – what the falloff is like from leads to starts. Are you seeing bottlenecks more on the training side?

Is it more from a patient resources and economic side, just not wanting to commit to a pump at this time?

And then, just second question, I will ask it now, is just, what have you learned through this telemedicine and virtual training process that you think can – that you can apply towards Horizon launching and patient onboarding from that perspective as far as bringing down barriers to adoption and just improving the overall ease of use in the pump ecosystem from a longer-term perspective? Thank you.

[Shacey Petrovic, President and Chief Executive Officer]

Great. I think Wayde can take the first part of your question and I'll address the second.

[Wayde McMillan, EVP, Chief Financial Officer and Treasurer]

Sure. Sounds good. So we typically see a few weeks to a month lag between our sales leads, and then leading into our new patient starts. And so, as I mentioned, we saw the decline in sales leads really hit in March.

But our teams have done – this is in direct reference to Shacey's prepared remark, where she talked about the ability for the team to transition to working remotely and working through telehealth and we've done a great job through the end of March and into April transitioning what was in the pipeline into new patient starts.

And so, when we guide to a reduction in new patient starts of 50% to 75% for Q2, it is a result of looking at that sales lead pipeline, what happened to it in March, what we've seen happen to it in April and what we are calculating will be the impact in May and June. So that's the way the math works on that one.

So from a training perspective, that you mentioned, Kyle is, our teams are doing a great job. As Shacey said, we are into the thousands in the first few weeks and ramping every day. And that's both U.S. and OUS.

The IT teams have worked with the marketing teams to rapidly learn what are the bottlenecks – worked with the HCPs to find out what are the bottlenecks and these teams every day are clearing hurdles, and we are getting more efficient at being able to train people virtually.

[Shacey Petrovic, President and Chief Executive Officer]

And I think on your question tied to what have we learned about Horizon, I mean we continue to learn every day. But I'll tell you that the most exciting thing from my perspective about Horizon is that, it really has been designed from the outset to be the simplest technology on the market and so that will lend itself very, very well to a telehealth environment.

And the other great thing about Horizon, besides its simplicity, is that there is real-time access to cloud data. And so that will be – that should enable some really easy and effective interactions between patients and physicians, whether they are happening in the clinic or in particular, if they are happening via telemedicine.

[Wayde McMillan, EVP, Chief Financial Officer and Treasurer]

Next question, please?

[Operator]

Our next question is coming from the line of Danielle Antalffy of SVB Leerink. Your line is open.

[Danielle Antalffy, SVB Leerink]

Hey, thanks. Thanks so much for squeezing me in. Congrats on a really strong quarter. It's good to see. I had a quick question on attrition and sort of what you are seeing or what, I guess, you saw in the last few weeks of the quarter. I know you have this patient assistance program. How you are seeing that be utilized? And yes, I guess, maybe let's start there.

[Wayde McMillan, EVP, Chief Financial Officer and Treasurer]

Sure. So I can start, if you like, Shacey. And I just mentioned to a previous question there that through Q1, actually attrition was a little better than we've had historically. And so, in the face of the pay-as-you-go model where we thought we could see some higher attrition. We actually saw lower attrition.

As we get more acute into the month of March, it becomes harder to know if someone's actually attrited. It takes a bit of time to figure out if they've just skipped an order or if they've attrited. But we actually saw the opposite. I called out in the prepared remarks that we are estimating a $4 million of end-customer stocking.

And to break that down, we have really good insight into our direct business, which makes up about – still makes up almost half of our business. So, we know exactly when a customer asks for an order earlier than it would typically be shipped. And so, we estimated about $4 million worth of customers pulled the orders from Q2 into Q1.

And just to clarify for guidance for Q2, we are not assuming any impact in Q2. We are assuming Q2 has the same pull-ahead from Q3. And we expect that we'll see the other end of that headwind in the second half when it normalizes out. So, we kind of saw the opposite, Danielle, where we saw some strength in March, because of customers ordering. We are assuming we are going to see that again here in the second quarter.

As far as attrition goes, I think it's probably a little too early for recessionary impacts to start pushing on metrics like attrition in the first month here of April. So that one is still a TBD and we'll monitor that one very closely.

As far as the financial systems program, we are not quantifying it right now, because we don't know exactly how many people are going to take advantage of that program and how utilized it will be. As Shacey mentioned, it's just really important for us and right in line with our mission to make sure that if there was someone who in the U.S. has lost their job and lost their insurance and whether they are in the process of getting coverage through Medicaid or another means to insurance, we wanted to be there to backstop them.

And so, we can't quantify that one at this time. I prioritized it in our list of gross margin headwinds at the end, because I think it'll be one of the smaller headwinds. But we'll – that one is yet to be determined.

[Danielle Antalffy, SVB Leerink]

Okay. Great. I’ll just leave it there. Thanks.

[Shacey Petrovic, President and Chief Executive Officer]

Thanks, Danielle.

[Wayde McMillan, EVP, Chief Financial Officer and Treasurer]

Thanks, Danielle.

[Shacey Petrovic, President and Chief Executive Officer]

And then, we'll just take one last question please.

[Operator]

[Operator Instructions]

[Shacey Petrovic, President and Chief Executive Officer]

We can leave it there then.

[Wayde McMillan, EVP, Chief Financial Officer and Treasurer]

Yes. If there is no one on that, thanks.

[Shacey Petrovic, President and Chief Executive Officer]

Yes. Thanks, operator. So, thank you. Despite volatile market conditions, we delivered strong operational and financial performance in the first quarter. The team adapted quickly to challenges and executed on behalf of our customers, shareholders and other stakeholders. So we'll continue to monitor the situation and keep you all updated to the best that we can during this unprecedented times.

And I just want to close by thanking our global Insulet team across three continents for their relentless hard work and dedication. It's because of you, that our team remains safe and healthy, that our customers know they can rely on us, even in the face of this pandemic to get the product and support that they need.

So thank you all for joining us today. And our heartfelt thoughts and wishes go out to all of you and your families to stay safe and stay healthy. Thanks.

[Operator]

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