Insulet Corporation (PODD) Earnings Call Transcript & Summary

All right. Good morning. I think we'll get started. Welcome to the 41st Annual Raymond James Institutional Investors Conference. My name is Jayson Bedford. I'm one of the medical device analyst here at Ray J. It's our privilege to have with us the senior management team from Insulet. They've been a loyal participant in this conference for many years. With us, we have Head of Investor Relations and Corporate Communications, Deb Gordon; CFO, Wayde McMillan; and the CEO, Shacey Petrovic. So I will hand it off to Shacey, and we'll have the breakout downstairs in, I think, Amarante 5.

Thanks, Jason. So I might be double mic-ed here. So hopefully, I'm okay. But it's great to be with you all this morning to share a bit about Insulet Corporation. Our mission at Insulet is to improve the lives of people living with diabetes. And we do that through our novel Omnipod Insulin Management System. You can see Lexi here on the side, and Lexi's wearing Omnipod on her arm. It is the only FDA-approved patch insulin pump. Provides 3 days of nonstop insulin and can be worn anywhere on your body. Obviously, is waterproof. Lexi's an avid swimmer. And today, I'm going to update you on the myriad of a really exciting initiatives that we're making progress on at Insulet to continue to grow our business. And what you'll learn today is that we have an incredibly large and underpenetrated global market opportunities that is diabetes. I'll talk a bit about that. We have incredibly differentiated, both products and our innovation and business model, strategies. And so I will talk a bit about that. In particular, I will talk about Omnipod DASH, our current relatively new product that's in the market today and launching in Europe. I will talk about Omnipod Horizon. We recently made an updated announcement yesterday regarding the status of the Horizon trial, and I will talk a bit about that. And then I will talk a bit about our vision for our product pipeline. And then finally, I'll talk about our plan to continue our remarkable trajectory in terms of execution with continued investment in commercial and innovation. So diabetes is a global epidemic. And across the United States -- actually, just the United States, it is estimated that somewhere between 25 million and 30 million people live with diabetes. Omnipod is available in actually a relatively small footprint in the globe. So you can see here, it's in the areas that are highlighted in green. We're available today in North America, in Israel and in a portion of Europe. And in just those countries, actually, 10 million people, we estimate, can benefit from Omnipod because they require daily insulin. And you can see that there's a tremendous opportunity to continue to grow the business because, actually, we're in the small footprint with a lot of white space yet to bring our technology to and millions more people who can benefit from Omnipod. So our plan over the coming years is to continue to penetrate further into the markets that we exist in today as well as to bring our technology to more markets across the globe. And specifically, in 2020, we've shared that we plan to grow into 5 new markets this year, primarily in Europe and the Middle East. So of those in the United States, 25 million to 30 million people that live with diabetes, approximately 10% of them require insulin on a daily basis. And that is the market that we serve. And if you think about a person who requires insulin on a daily basis, they essentially have 3 choices in terms of how they deliver their insulin. You can see on the left here, multiple daily injections. It's 4 to 5 injections every day via vial and syringe or pen. And then on the right, you can see the conventional insulin pump, and that is -- that system is pictured here today, that was introduced in the '80s, and it is a disposable piece of equipment. That's about the size of an old pager, and it contains an insulin reservoir that is connected via 3 to 4 feet of tubing to a user's abdomen, and it provides continuous insulin infusion. All of the data that's been published on pump therapy indicates that there are great benefits to continuous subcutaneous insulin infusion. It reduces morbidity and mortality and helps people live longer, healthier lives. But actually, if you look at the global population, still today, people who require insulin, 95% of them rely on multiple daily injections, despite the fact that we know that continuous insulin infusion delivers important health benefits. And so the question is, why is that? And that's the question that we set out to answer as Insulet, and Omnipod is our answer to that question. The research would indicate that the reason people haven't adopted conventional tube pump therapies is that they are very expensive. This system shown here will cost a user somewhere around $5,000 upfront in the United States. And then with some ongoing costs associated with the disposables, the tube sets and the inserters. The other reason is that they are perceived as very complex. And so you can see the multiple components here that a user has to use in order to get up and running on the system and the user interface itself on these systems often very complex. And so that has niched them to what clinicians will describe as tech-savvy patients who can manage well with these systems. And then the final reason is discretion. Most people don't want to wear a piece of capital equipment on their waist advertising their disease. And so Omnipod, which is pictured in the center here on Tom's arm, was really designed to address those limitations and help more people who are relying on multiple daily injections today get the benefit of subcutaneous insulin infusion. You can see a very simple device, can be worn anywhere on your body. Very discrete because it can be worn anywhere on your body. And just this year or this past year, in 2019, we eliminated the upfront cost of the system. And so we have greatly reduced the barriers to adoption and to trialing the system in the marketplace. And so that has helped us to grow. The vast majority of new users come to Omnipod from multiple daily injections. Our user base has been growing rapidly, primarily from that target segment. We have more than doubled our customer base in the last few years because of more people adopting Omnipod. So you can see, historically, we have said that 75% to 80% of our new users come from multiple daily injections. Actually, on the last earnings call, just last week, we announced that now for the quarter, it was over 80%. So we are helping to grow the overall category of subcutaneous insulin infusion with Omnipod. And for multiple daily injection users, Omnipod is viewed as a technology that can help them spend more time doing the things that they love and less time managing their diabetes. And in fact, the majority of people who become Omnipod users tell us that they would not have adopted pump therapy if not for Omnipod. So we are helping to grow the overall category, helping to convert more people from multiple daily injections to pump therapy through pod therapy. Historically, most of our growth came from the Type 1 users, and that's represented by Layla here on the left, our aspiring ballerina. And you can see Layla's wearing the pod on her arm. In fact, Insulet is the market leader in pediatrics. Omnipod holds the #1 share there. And we've seen great growth in our Type 1 users for the reasons that are listed here and that we've talked about. The fact that it's discrete, it's easy to use. The fact that we have eliminated access and cost barriers more recently, and that we have a very easy to train, easy to adopt system. Those same advantages that have been driving record starts and record adoptions in Type 1 users are also true and actually even more true for Type 2 users. The Type 2 user is represented here on the right by Ernesto. And a Type 2 user typically develops the disease later in life. They can be diagnosed typically in their 50s and it can be very challenging because it's a progressive disease, Type 2 diabetes. People have often failed lifestyle modification, failed medical management or therapies and then moved on to insulin. And later in life, with a challenging chronic disease, have to start to count carbs, manage technologies like blood glucose meters or continuous glucose meters, monitors. And of course, technologies like Omnipod and insulin pumps. And so historically, not very many people in the Type 2 segment have adopted pump therapy. But more recently, we have seen great adoption among Type 2 users. On our last call, we noted that it was our third consecutive quarter of record Type 2 adoption, a notable inflection point. And last quarter, we said that 30% of our new users came from Type 2 segment. So actually, last quarter was a record-breaking quarter for both Type 1 adopters as well as Type 2 adopters in the United States. And so the question might be, why we are really having success in a segment that historically pump therapy has not been adopted in. And the first reason why we started to have success in this segment is that we have established Medicare reimbursement through the pharmacy channel. And this reimbursement, actually, in the pharmacy channel has enabled us to go to the pay-as-you-go model and eliminate upfront costs and simply pay through the pharmacy and through the co-pay just as the disposables are being used. So it enables other segments who might not normally trial the technology to actually start to trial the technology because there's low upfront cost and see if it works. And we know it's working very well for the segment. And then second is Medicare reimbursement. We know that 40% of the people living with Type 2 diabetes that are insulin-dependent are over the age of 60. And so Medicare reimbursement is particularly important to be able to unlock the Type 2 insulin-dependent segment. And that's something that is unique to Omnipod. We are the only pump that is available in the pharmacy channel in a widespread fashion with Medicare Part D or pharmacy benefit for Type 2 users. And it means that there's broad access among people living with both Type 1 and Type 2 insulin-dependent diabetes, enables us to bring our technology to more people. The pharmacy is one piece of the story. The other piece of the story is this, what we call the pay-as-you-go model. And this is the idea that there's no upfront cost. And that simply, users pay or payers pay for the technology as the disposables are being used. And this is really important because as new segments are opening up to us, like Type 2, it's not a segment that historically, physicians will have prescribed pump therapy for and it's not a segment that necessarily is very aware of pump therapy. And so it's important for us to reduce barriers to trialing the technology so that we can open up that segment and demonstrate the value among those patients. And we have successfully done that with the pharmacy channel in this pay-as-you-go model, which now enables more physicians to try Omnipod on new segments like Type 2 insulin-dependent patients and it allows patients to try the technology without having multiple thousand dollar upfront cost or a 4-year lock-in period. So these are advantages that are certainly true for both Type 1 and Type 2 users, but particularly important as we try to open up a new segment like the Type 2 insulin-dependent segment. So we've been innovating pretty significantly and disrupting the market in terms of the business model and eliminating the barriers to adoption and trialing of the technology with the pay-as-you-go model in the pharmacy. And we've also been innovating significantly in terms of our product pipeline. So you can see that here. Our fundamental belief is that in order for Omnipod to be adopted by the millions of people across the globe that it can benefit, that we need to focus on what we call consumer-focused innovation. And that means that as we innovate and bring more features and more functionality to our technology, that we keep it simple. And what I mean is your mobile phone simple. That these technologies, complexity really prevents people from adopting them. And so as we bring features and functionality, like CGM integration or automated insulin delivery, our goal is to not compromise on ease of use. And we believe that will be a differentiator in the market. You can see, on the right-hand side, our future vision for the technology. And our vision, which is not yet a reality, but it's going to become a reality, our vision is that if you imagine that you are diagnosed with either Type 1 or Type 2 insulin-dependent diabetes. Our vision is that you can walk into your physician's office or maybe even the pharmacy, and you can download -- store on whatever mobile phone you are using, you can select your sensor, you can put on your pod, put on your sensor, enter one simple parameter, like perhaps your weight, and be off to the races, easily and seamlessly and effectively managing your glucose and in tight control, thinking less about your diabetes. So that is our vision. And our current innovation Omnipod DASH, which is pictured on the left here, and Omnipod Horizon, which is coming soon, pictured in the center, are really important steps towards realization of that vision. So let's talk a little bit about DASH before we dive into Horizon. You can see DASH pictured here on the left. You could see the pod and then the PDM, which is a locked-down Android device. And in fact, it's the first time ever that the FDA has cleared a commercial device to control a pod or an insulin delivery system. It is a lock-down phone. So all it does is act as the remote controller for the pod but is one step towards phone control, personal phone control of pods, which is where we want to go with Horizon. This system communicates via Bluetooth. And what that means is that we're able to pool information to the cloud. And with this very simple, modern, intuitive user interface, we're also able to offer a suite of mobile apps to help improve ease of use for our patients. So you can see in the center is our user app and insulin view with the Dexcom CGM sensor. And this is a mobile app that is on a user's mobile phone, their iPhone, for example. And it gives them a snapshot of their really critical Omnipod data without having to go digging for the DASH PDM on the left. So on their mobile phone, you simply click on your phone. And in your widget view, you can see your CGM data. You can see your insulin on board, your last bolus, kind of the really important data that people may want to look at because they look at their phones every 2 minutes, and they use their PDMs really only a few times a day to deliver a bolus or to prime a pod. And then all the way on the right is our caregiver app. And this is an app that is downloaded by the loved one of an Omnipod user, so a parent, or a spouse, or a school teacher. And with the consent of the Omnipod user, you can view their data, their Omnipod data to ensure that as their CGM might be going up or down, that they've taken appropriate action on their insulin delivery. And so this is designed really to give parents and other loved ones a peace of mind about how their loved one is doing on Omnipod. So a really terrific product. We've just -- we're celebrating about a year launch in the United States and launched just a couple of months ago in Europe. The feedback has been terrific, and it's an important step and foundation for bringing Horizon, Omnipod Horizon, our automated insulin delivery system, to market. So for those of you who are not familiar, we have been in clinical and product development with Omnipod Horizon for approximately 3.5 years now, and this is our partnership with Dexcom to integrate the data from their CGM sensor. And to through a very sophisticated algorithm on the pod to automate insulin delivery for our patients. One note is earlier yesterday, we did announce an update to our Omnipod Horizon pivotal trial. We were about halfway through our pivotal trial, and we identified a software anomaly. And this has to do with basically how the CGM signal is processed in certain circumstances. This anomaly is very rare in the set of circumstances, with which it would have to occur are also extremely rare. And in fact, there have been no patient-reported complaints about the issue. And so certainly no adverse events either. But it came to us because we now have unprecedented access to the data. We were reviewing all of the technical data, and we saw that this glitch had the potential to impact insulin delivery. And so we're pausing the study for 8 weeks so that we can resolve and update the software, at which point, we will resume the clinical data. And actually, we've reached out to virtually all of the patients through the sites in the trial and the message has just been that they're incredibly attached to their Horizon systems, and they simply want their updated software and to resume closed-loop therapy as soon as possible. So we're going to make that happen in 8 weeks. And what that means is that the system will be available then in 2021, early 2021. So you can see the system here pictured on Jenna. So very similar to many of our users today, they will wear a Dexcom CGM and an Omnipod. The difference is that the Omnipod contains a sophisticated algorithm. And that algorithm speaks directly to the CGM sensor without the need for any external devices, your phone or a PDM. And it takes the reading from the CGM every 5 minutes. And then based on its projection of where the patient's glucose is going to be in an hour, it delivers micro boluses of insulin. So very similar to how your pancreas works. A very exciting technology. We have been, to our product vision, investing in making this the easiest to use, simplest technology that can deliver better outcomes. And what that means is we focused in 3 areas. The first one is designing the system for the greatest time in loop. The more time that -- our belief is that the more time a patient spends in loop, the more time they will spend in range and the better outcomes they will get. And so we took the time to put the algorithm on the pod as opposed to the PDM or the cell phone. And this was an important choice because it means that when the patient is showering or the person is running or working out or swimming, that they can stay in closed-loop therapy because all they need is their pod and their sensor, both of which are waterproofing, can be worn in those circumstances. The second thing is, we've designed it to provide the greatest personalized therapy. And so what this means is, number one, we will provide multiple set points or multiple targets that the user can target their range to, from 110 to 150, in increments of 10. And this means that the system will be adaptive to any number of circumstances that the user needs it to be. So in the instance that a user might want to run higher because they are working out or because they are about to do a big presentation in front of a group, and we know that stress can sometimes make you go low or high, you may want to adjust your insulin setting. And these multiple set points will enable the user to adjust their system to work best for them in a number of circumstances. And it's also designed to adjust with the user over time. So I mentioned we were the market leader in pediatrics. One thing that is true of kids is that their insulin needs change over time as they grow. And the system is designed to learn and adapt with the user and adjust for those insulin requirements. And then finally, and probably most exciting, because it is the single most frequent request that we get from both users and nonusers is Horizon will bring personal smartphone control of the Pod. So that means we can eliminate a component of the system, that the user will be able to download an app on their mobile phone and be able to control their pod and their Horizon system via an app. Really exciting step forward. DASH was step 1 with this lockdown cellphone. And the next step is personal control with Horizon, which we are very excited to deliver to users. Okay. So I wanted to show just a demonstration of how the algorithm works. And what you'll see coming across the top is the user's current glucose. And then what you'll see on the bottom is what the sensor or what the Horizon system is doing in terms of insulin delivery to accommodate for the glucose. So you can see, as the glucose is projected to either be flat, it will suspend. As it's projected to go high, the insulin system, every 5 minutes, is taking a reading and delivering a micro bolus of insulin based on that reading. And again, as it's projected to go low, the system suspends. So it really does operate much like our pancreas does. And this has tremendous potential to reduce the cognitive burden of people living with diabetes, to be able to take a lot of these estimates and this management work away from the user and do that work for them with greater ease of use and ideally better outcomes. Horizon, for us, is a platform on which we will be bringing multiple generations and we think multiple iterations of value to the market and to our people living with diabetes. And so we're excited to have recently announced expanded partnerships to be able to support multiple generations and expansion into new patient segments. We announced recently an expansion of our partnership with Dexcom to include their G7 sensor into future generations of Horizon. And we also announced an expansion of our partnership with Abbott to include their next-generation Libre sensor into future generations of our Omnipod Horizon system. Both of these are long-standing partners. We've had a terrific development relationship and partnership with Dexcom in our current Horizon system and excited to bring G7 into the mix. And Abbott has had an incredible trajectory of growth with Libre. Now I think their latest projection was 2 million users, very important as we think about new segments like Type 2 and continued expansion there. And very important as we think about particular international markets where they are more prevalent. And so both are important to us as we think about bringing sensor choice and bringing Omnipod and Horizon to the most people that we can benefit. And then, of course, we also have a partnership with Tidepool, which is the DIY communities, homemade automated insulin delivery system. And we are working with Tidepool to help get this system, which has an increasing use in the market, get it studied, get it validated and get it FDA-cleared and commercially supported. And Tidepool, with Horizon, we will launch first to market with Android mobile phone control, and we will follow with iOS control. Tidepool has the potential to be the first iOS-controlled system on the market because that homemade system was actually created on an iPhone. And so that's under clinical evaluation today with the FDA. And then finally, so innovating in the business model, innovating in product development. And then we are also innovating in terms of our manufacturing capability in order to support this rapidly growing demand. We now, gosh, it was about 2 -- well, it was about 3.5 years ago that we conceived of the investment in automated manufacturing in the U.S. Historically, we have manufactured primarily in China. And the view was that we could make this investment in automation in the U.S. And through automation, we could reduce the amount of labor required to manufacture the pods. We could expand margins. We could expand capacity, which is a necessity. And we could also support redundancy in our supply chain and in our manufacturing operations. So we -- at the beginning of 2019, we opened our U.S. manufacturing and worldwide headquarters in Massachusetts. We brought line up -- or line 1 up in 2019, and that is ramping nicely. And then we have just installed line 2, and we've said that, that will start to produce salable product at the middle of this year. And then we plan to bring line 3 up later on this year, and that will start to produce salable product sometime next year. So this is a headwind for gross margins in the short term, but it's very much a case of slowing down to be able to speed up on a margin front. It is a contributor to us getting to our 2021 goals of 70% gross margins or above. This is one of the biggest drivers here. And that's because one line in the U.S. will manufacture 50% of all of our lines in China with 90% fewer headcount. So it is a remarkable investment in automation to be able to drive value in terms of margin accretion over the long term. And our plan is to continue this remarkable financial trajectory. I find this quite impressive because the company, if you think just 6 years ago, in 2013, 6 or 7 years ago, we finished 2013 at $185 million in revenue, 48% gross margins, and the company was not profitable. And then we just finished this last year at almost $740 million in revenue, 65% gross margins and solidly profitable with a 7% operating profit. And then you can see, we plan to continue this trajectory, our stated goals publicly, which we laid out, I believe, at the end of 2016, our $1 billion in revenue, 70% gross margins, driven primarily by that U.S. manufacturing investment and mid-teens operating margin. And most importantly, this financial trajectory and this trajectory of execution will enable us to continue to make very positive impacts on people living with diabetes, like Kate Hall, who's pictured here. She was -- is an Olympic track hopeful and was recently featured on the cover of Runner's World magazine, where she talked about how Omnipod really enables her to compete at the levels that she does. And our mission is to continue to improve her life and reduce burden for her. And I think what is remarkable about Insulet is that very few companies of our scale, approaching $1 billion in revenue, are growing at the rate that we're growing at, 20% over the last -- this last year was our fourth consecutive year of 20-plus percent growth. But really just scratching the surface of the incredible market opportunity out there in this growing unmet need related to the epidemic that is diabetes. So thank you very much.

Shacey, great job. Perfecting timing. The breakout will be downstairs in Amarante 5.

Okay, great. Thanks. Thank you.