Insulet Corporation (PODD) Earnings Call Transcript & Summary

Hi, good afternoon, everybody. Welcome to the Barclays Virtual Global Health Care Conference. I'm Kristen Stewart, the medical supplies and devices analyst. It is my pleasure to kick off this session with Insulet Corporation. With me today, I have Wayde McMillan, the Executive Vice President, Chief Financial Officer and Treasurer; Bret Christensen, Executive Vice President and Chief Commercial Officer; and Deb Gordon, Vice President, Investor Relations and Corporate Communications. If you're listening on the webcast and you would like to ask a question, you can e-mail me at [email protected]. You can also chat me on Bloomberg chat. I am actively monitoring my chat screen.

All right, guys. Thanks for joining me. I'm going to start off today's session with a question here on the topic of the day, which should probably catch you by no surprise, COVID-19. It's obviously a very fluid, dynamic, evolving, ever-changing, pick your adjective to describe this situation. The impact was just isolated in China not too long ago, but obviously, it has spread around the globe into other regions. I know you guys have manufacturing in China. I know you're moving it and opening up new manufacturing facilities in Massachusetts, which are very nice, I might add. I was wondering if you could update us on your current thinking on the potential impacts of COVID-19. And thanks again for joining us. I'll turn it over to you guys.

Sure. Kristen, and good afternoon, everyone. This is Wayde speaking. And as Kristen said, we have Bret and Deb on [Audio Gap]

Excuse me, this is the operator. If you can hear me, please respond. Hello, this is the operator. Can you hear me? [Technical Difficulty] [Audio Gap] and on the product supply side, we do not anticipate any material impact there either. At this time, our automated facility in the U.S. is starting to provide manufacturing redundancy for us. Looking back a few years, it looks like a very good decision to build redundancy with the plant here in the U.S. We were dealing well with the recent tariff situations. And now with a virus challenge outside and inside the U.S., we're happy to be ramping our U.S. facility here in the U.S. And then speaking to our manufacturing plant in China, which is providing most of our volume at this time. It is up and producing and ramping each week. We did see a slower start than usual, slower ramp-up than usual post the Chinese New Year. However, the teams -- our teams were proactive. They've responded quickly, working really well with our third-party manufacturer, and we believe, done a really great job. So along with our U.S. manufacturing, our China facility ramping up. We feel confident on the supply side. In combination with the inventory, we had a good strong base of inventory build at the end of the year. We typically do build inventory ahead of Chinese New Year. We had actually built a little bit more than we had originally planned because we had good performance out of the China facility. So we actually entered the year at a very strong inventory position. And now with the China facility up producing, and we're shipping out of there, in combination with U.S. manufacturing, we feel good about the supply side as well, Kristen.

Okay. Great. And then let's, I guess, shift gears and talk more about the future. I guess one of the things that you had announced with the last quarter call was just about the Horizon pivotal trial. You had started enrollment there and you identified a software anomaly having to do with the CGM signal and how that's being processed. And I was wondering if you could maybe just update us on how you discovered it? I understand it's pretty rare, and there were no patient-related complaints or adverse events. But maybe just walk us through how you discovered it and how you intend to fix it?

Bret, do you want to...

Yes. Kristen, this is Bret. I'll start with that one. So I think it's helpful to provide a little bit of background first to the trials. If you remember, we started our enrollment at the end of 2019. And very quickly enrolled the 240 patients required for the trial. In fact, demand was very high, there was no shortage of patients interested in participating in this trial. We got started, and the goal of this trial was to get 21,000 patient days on product. And so everything was going fine, and we got to about 9,000 -- almost halfway through the trial, 9,000 patient days when we discovered this anomaly. It was -- nothing to do with the algorithm, nothing to do with the Dexcom sensor, but rather in the software, there was a bug where, in rare instances, if the pod did not receive a CGM value for some reason, Bluetooth connectivity or some other reason, along with a few other factors, in rare circumstances, it would use a stale BGM value. The good thing about this is it was not patient reported. There were, in fact, no patients that even realized there was an issue with the product. But we uncovered this through a report monitoring system, which gives us this unprecedented access to real-time data. So we noticed this anomaly. We decided it was something that could happen, even in rare instances. And so we voluntarily paused the trial for 8 weeks. So what we plan on doing now is fixing the bug, sometime by the end of April, we should have that done. And then we pick up right where we left off, that 9,000 hours to finish the remaining -- or 9,000 days rather to finish the remaining 12,000 days of the trial.

Okay. And how exactly do you fix the bug, because the software resides on the pod, is that right?

Right. Yes. It's a software fix, which is -- again, it's a good news because it's not anything to do with the hardware, nothing to do with the CGM and nothing to do with the algorithm, which we're all thoroughly vetted to our IDEs. So it's simply a software fix. And what we need to make sure we incorporate is that when we don't get that value from the CGM that the software doesn't use the stale value, it just acknowledges it did not get a value from the CGM. It notifies the user, that there was a communication issue. And then if it persists, it might require the user to replace their CGM. But we just don't want it using that stale CGM value as part of the equation.

Okay. I remember you guys had also an issue with the software user interface with DASH, I think, a while ago. Is that something that was also kind of related? Or is that something completely different issue?

Slightly Different. And so this was another really rare instance with the bolus calculator for DASH. Of all the users that we've got on DASH and use it almost a year now, we only -- we had 11 complaints. So just 11 instances of this happening that we know of. And again, this was just an instance where the software could use a -- only a CGM value, but this was the situation that happened when the PDM freezes up, which is a rare thing that happens. And so we're in the process of fixing that now. We've stated that probably sometime the end of March, we might have that software done, and then we'll be replacing PDMs with the users that are in the field.

Okay. Great. Thanks for clarifying that. All right. To go back to Horizon. So you had said, basically, you'll fix that bug sometime the end of April. Then you'll go back, restart that trial. When do you think you'll likely be able to finish enrolling in that pivotal? And when should we expect to see that data from that study?

So again, the enrollment is complete, right? So we'll pick up at 9,000 hours, right? And then we've got to -- we just got to complete another 12,000 patient days before we get the data, and get ready for submission and submit the data. We probably won't get a peek at any of these data until later in the year. What we have said is that at ADA, there was a special invitation for our lead investigator to present some of the pre-pivotal data that we had. So that will be presented at ADA, and that might be the first glimpse into some of the data for audiences out there, but the complete clinical trial data won't be until later in the year. There might be an opportunity at, say, ASD late in the year, but we haven't determined that yet.

Okay. And so now this will push the launch time line until 2021, correct?

That's right. We've said early 2021. That's right.

Okay. Okay. Perfect. And how do you just think about the competitive landscape of this device versus what we would expect to see out there with Tandem and Control-IQ, and then whatever Medtronic eventually will have out there at whatever time they end up launching their product, which no one seems to know when that will be?

Sure. I can start with that one. Wayde, you could provide some color because there's a lot to discuss here, really. But we recognize there will be some competitive systems up in the marketplace this year prior to our commercialization of Horizon, Tandem being one of those and potentially Medtronic. We have always historically sort of separated our users from tube pump users. And there are certain things they are looking for. So we've called out that around 75% of our new starts come directly from MDI. This past quarter, we said that was elevated slightly to 80%. So the good news for us is that we know that our users are looking for something very specific that only Omnipod offers. We also have the highest retention and lowest attrition in the industry, and that's because our users won't sacrifice the form factor and the ease of use that Omnipod already provides. That said, we do recognize that these systems will be in the marketplace this year. It might provide some noise, and we'll see what that means to new starts, but we don't really anticipate much of an effect on attrition.

Okay.

Yes. Kristen, I'd probably just add to what Bret said there, from a competitive standpoint, which you had in the question. Today, we compete very well with our form factor, our new DASH innovation, our business model innovation, and we believe when we get to Horizon with CGM integration and certainly with phone control, we'll level the field -- playing field with CGM integration, like the others. And then certainly, with phone control, we feel we'll have both the best form factor and business model to not just help type 1s, but very differentiated position with type 2s.

And what do you think just about also as Tandem's looking -- shipping out their t:sport product as well. They're trying to position that as -- not exactly, obviously, a pod-type product, but kind of moves along the lines of it, it's kind of half the size of their existing, it has that some live discretion factor. It's not quite -- but obviously, still has tubes and whatnot to deal with, but seems like they're trying to appeal to a pod-like patient, but not quite there. Do you think that might be some sort of additional competitive headwinds when they eventually launch that product or not necessarily?

Well, Kristen, let's start with that. This is Bret again. I think, if anything, to me, it's a reinforcement of the power of Omnipod and the power and the form factor. And there are many that are trying to replicate what we have. We also get really good insights into competitive patch pumps outside of the U.S., where typically they tend to launch. t:sport might be the exception to that because Tandem is a U.S.-based company. But we've seen -- internationally, we've seen products like Cellnovo, Kaleido, Roche, and there are a lot of -- Medtronic, there's a lot of competitive patch pumps out there. None really, in my mind, are having much success because -- I think for a number of reasons. One is the IP that we have around auto insertion is really powerful. And that's a feature, by the way, that makes Omnipod extremely attractive to our users. It's that, we put a pod on and in 200th of a second, it deploys a needle in a small catheter, and that replaces the 15, 16 injections that a user we'll need to have over that 3-day period. Yes, this could be much more complex and involves some sort of an insertion that with the cannula, they involve complexity. And so it's hard to say how t:sport will end up. But that still is, in my mind, is a tube pump, just a really small tube, but there's a lot of complexity around insertion and ease of use. And so I think it's great that others are reinforcing the value of the form factor of Omnipod. I think that many of those patients will recognize us as -- in that regard.

Yes. If I could just add... go ahead, Kristen.

Yes. I think... no, no go ahead, Wayde.

Yes. I was just going to tack on to what Bret said there. Certainly agree with -- as Bret talked about. And maybe I'll just add on perspective, sort of talking more generally about the differentiated patch design and on-body patch pump design. I can't -- I'm not sure exactly what their strategy is. But Bret mentioned there's others coming. In a market this size, sometimes it can be beneficial to have multiple companies developing the market. We're trying to change the market paradigm here, particularly for type 2s, where potentially multiple daily injection users, that's not the first solution. It's a difficult first solution when someone has to be trained to inject their child or inject themselves or a loved one. We envision the marketplace as, instead of doing that tripod therapy, they try it for 30 days, 90 days, with Horizon, clinicians, doctors will be able to see the same data that their patients see on a daily basis. And so instead of training an MDI first, let's have people try pod therapy. As Bret talked about, the painless auto injection feature that differentiates our product, and if it works after 30 or 90 days, people can continue with pod therapy before they even go to MDI. And so I think if someone wants to help move the market away from tube pumps to build the tube pumps to more of a patch pump design, we think that could be a positive. And if others do want to help move the market in that direction, we think we're going to be very well positioned with our form factor. And then I should probably just mention our business model, too. I mean we think our business model creates a huge moat because for those that are taking 4 years of revenue upfront in a capital model today, if they're going to move the market to where we are in this annuity model, I mean, we just take a fraction of revenue in the first quarter or first month for a few pods or for a few patch pump design in our annuity model. So I think that's a big question mark is to see how some of the existing competitors would shift. And as we know, it took us over a decade to build up a large enough customer base to sustain the business model we have today. And so that's a challenging period of time to acquire enough customers in annuity model. So we believe that's a strong moat for us. And then even if they do -- those become another player in the market or 2, we think they'll just help us move and shift the market paradigm over to one that's more beneficial for an on-body pod therapy type experience.

Right. And where are you today just in terms of kind of tapping into that like type 2 patient population? Because it does seem like with the business model that you have and the capabilities that you're building that you're particularly -- or potentially, I guess, advantaged to really take advantage of the opportunities there. Maybe -- I know that you've talked on your calls about having some patients, the type 2 insulin dependents. Maybe just touch on that. So we've seen some other players with patch pumps, trying to get into that market, had Valeritas come and go. Unfortunately, you saw J&J try to build into that market with Calibra. They sold that products off to CeQur. I think they're still trying to have a go at it. Where are you with trying to get into that type 2 space?

Yes. Kristen, I think what it shows you is many recognize the size of that opportunity and how valuable that could be to unlock the type 2 patient on product. And so we've been fortunate in some regard because of a few things that have come together for us at the same time. The first is Medicare coverage, which we got a CMS designation at the very beginning of 2018 that was unlike one that any other pump company has. It was a Part D designation from CMS, which really defines us as a pharmaceutical and makes us ideally suited for that channel, which is exactly what we wanted. So we started in earnest then to really push into the pharmacy. Now the great thing about that is in that channel, there is not the same obstacles that exist in the DME channel, that type 2 patients have to overcome to get on product. And so there's -- we think there's always been a strong demand for type 2 patients, especially for a product like Omnipod that provides the discretion and ease of use that many type 2 patients are looking for. We know that physicians would love to get many insulin requiring type 2 patients on product to get them better control. It's just that none of those things have been available because of the restrictions that exist in the DME channel. And on top of that, we didn't have Medicare reimbursement, which really excluded us from the older population, and we know that 40% of type 2 patients are over the age of 60. So once we remove those barriers, I think what we're starting to see today is the true demand of type 2 patients within endocrinology, which is where our sales force and marketing efforts reside today. So we called out on the earnings call that 30% of our new starts were type 2 this past quarter. We think that's sustainable demand that once we get physicians accustomed to knowing that if they write a prescription for a type 2 patient, that patient is going to be treated just as a type 1 patient is in the pharmacy channel. So that's been a really good thing for us, and that's why we've seen, now really for 3 quarters in a row, a greater percentage of our new starts have been type 2. It's very exciting.

Do you think with Horizon and getting Horizon approved that, that number can accelerate? Or do you think Horizon could accelerate the penetration into type 2? Or do you think that, that just -- I guess how do you think Horizon kind of plays into this?

That's a great question. I think just as technology, in general, gets easier to use and gets better, that it does. And so Horizon is a step in that direction. But the other thing, I think, is that what's really driving action for us in a lot of instances, the patients are getting better information about their BG levels through CGM. And so one of the things that excites us is the that the large uptake of usage that both Dexcom and Abbott have seen in CGM integration, particularly with type 2s, that's going to create action because if these patients get more information about their BG levels, they want to do something about it, and that should drive them to a product like Horizon.

Yes. Yes. Okay. And then I guess, lastly, for you Wayde, let's put you back on the hot seat, financials. The company has laid out these goals of achieving $1 billion in revenues by 2021. Certainly, The Street thinks that you guys will be surpassing that based upon consensus numbers. Gross margin targets, 70% in 2021, up from 65% and where you guys are guiding, I guess, this year or where you ended up last year, rather. From what I can tell The Street may be a little bit more skeptical there and then operating profit targets, 2021, I guess, that's mid-teens from about 7% last year. Perhaps that might be a little bit more of an area of skepticism. Maybe just talk through more, I guess, on the margin side, since that seems to be the area where maybe there's a little bit more skepticism on The Street on what gives you the confidence [ sort of ] really get to those measures.

Yes. Thanks, Kristen. So agreed, we feel very well positioned for achieving $1 billion goal by 2021. And the gross margin is an area of significant focus for us. The single largest driver for getting to that 70% gross margins is our shift to automated manufacturing in our new facility in the U.S. And we had one -- or we have one line ramping, it's been ramping for about 9 months now. And so we're getting some really good learnings and experience off that. We actually have an update for you today. Our second line is up early and actually producing now salable products. So that anticipated mid-year, the team has redoubled efforts here, and we're very happy to be now producing salable product off-line. But that does mean for our gross margin guidance in 2021, we still believe we'll get to that relative consistent from 2019, which was 65%. As you mentioned, we're shooting for that 65% again in 2020. Now what it does mean is we'll probably see a bigger impact in Q2. As both lines start to ramp, we'll have small volumes carrying a large overhead burden in our U.S. manufacturing. And so it really is multiple scenarios running here, depending on how much product we produce in our China facility, how much we produce in USAM. But we're very happy that our line 2 is now up and cleared early and producing product. So the net of that then is, we believe the first half of the year will be lower gross margins, up to 200 basis points lower with a deeper decline in Q2 as line 2 comes on with more volume. And then we look to make it up in the second half and finished the year consistent with last year, again at 65%. And then speaking of operating margins, we are very focused on investing for growth here for the next few years. We have a leadership position, and we feel we're very strongly differentiated in ability to drive value for our patients, number one. We believe we've got solutions we can bring to people with diabetes. So we're going to invest to do that in the best way we can. We're also going to balance that with building a stronger financial profile. So as you mentioned, we're still shooting for that mid-teens operating margin. And some of that will be driven by that improvement in gross margins. So we feel good about continuing to build a stronger financial profile over the next couple of years as well as our ability to invest for growth and keep this leadership position going.

All right. With that, I guess, any closing final thoughts that you'd like to share with the audience before we disconnect because I think we are sadly out of time. I think, I could go on for a while.

I can just start -- okay. Go ahead, Bret, please.

Go ahead, Wayde.

I was going to say I appreciate, Kristen, all you guys did to keep this conference going and choosing an alternative format. I'm sure it was a heavy lift for you and your team, and people worked really hard. And from the calls we had today and this call, things went really well, and I think everyone tried to make it work as well as it could. So kudos to you and your team. And we appreciate everybody's interest in the story and continuing on with the conference the way it went. So I appreciate it. Now I can hand it over to Bret.

No, that's it. Thank you, Kristen. This was a really fast adjustment and things went well today. So I want to appreciate everybody that dialed in and listened to our call today.

Thank you. I appreciate your guys' effort, too. All 3 of you, Deb, Bret and Wayde to make it at work, too. It's, I know, not easy on your side. Definitely, a big thanks to all the clients that have dialed in or kind of tuned in and a big thanks to my team kind of on the back end for all their help in making this work too. So with that, I hope everybody stays healthy, particularly you guys up there in Massachusetts, and everybody on the line. So thanks again, everybody, and we'll all be in touch. Take care, everyone.

Thank you.

Thank you.

Bye-bye.