Insulet Corporation (PODD) Earnings Call Transcript & Summary

Good afternoon. This is Travis Steed at Bank of America, and welcome to our next Virtual Vegas fireside chat with Insulet Corporation. We've got Shacey Petrovic, President and Chief Executive Officer; Wayde McMillan, Executive Vice President and CFO; Bret Christensen, Chief Commercial Officer; and Deb Gordon, VP of Investor Relations. So we've got the full team. I'm glad to have them here this afternoon. And I'll turn it over to Shacey for a few quick comments, and then we'll jump into Q&A.

Great. Thanks, Travis. We're thrilled to be here with you. Thanks for hosting. And I think it's a great time actually to share some insight into what's going on at Insulet. We've obviously been on an incredible ride here, trajectory, in terms of growth, driven by significant investment in innovation, commercial expansion and resiliency in our supply chain and manufacturing operations. And so -- and then most recently, obviously completed financing to shore up our balance sheet and ensure we're in a really strong position to continue to deliver on our mission and continue to take advantage of this momentum that's at our backs. So we're thrilled to be here to share a little insight into what's been going on.

Great. And just since the stock offering was yesterday, just touch base on that to get started. The balance sheet was really already has a strong position in your businesses, very durable. It seems like you're just going to be prepared to invest through any kind of downturn, given the huge opportunity in front of you. Is that how you saw that? And then if the base case plays out, are you going to use the extra cash to maybe accelerate some of the other investments, geographic or go big in type 2? Just curious how to think about the extra cash that you have now?

Yes. I think, Travis, you've articulated it really well, and you guys actually put out a note of night that I thought summed it up perfectly. Our goal here with this financing is just simply to be in as strong of a position as possible to whether, whatever the current COVID and macroeconomic environment throws our way. We obviously laid out guidance for the year on last week's call. And so we understand our estimates, but we want to be prepared for any eventuality because we've got this momentum. We've got this strategy to invest for pretty exciting growth ahead. And so we don't want to have to take the foot off the gas, so to speak. And I think as you point out, there are any number of areas where we could overinvest accelerate in the event that things don't materialize to the downside. So it just puts us in a very strong confident position in today's environment.

That's great. And then on telehealth, just getting curious, everybody has kind of been forced there in some sort of fashion. But do you see that happening really around the country, every endo are there still hold outs? And how is the U.S. versus international markets doing with telehealth?

Yes, Travis, it's Bret. I can give some color on that. So we've seen it adoption for telehealth sort of really rapidly changed over the last couple of months. We've always been really well equipped for a telehealth world. We believe Omnipod is the simplest, easiest to use and really simple to train on insulin pump out there. What we saw in the beginning was -- and we talked about interactions with patients and endocrinologists, we're seeing a drop in interactions with patients, about 60%, even though telehealth was up around 300% for the same specialties. So they're adopting telehealth. They're just not quite to the volume levels that they have been pre-COVID. And so what we've been tracking and what we are really pleased about is that we've been seeing new starts that are ahead of that trend. And so while face to -- interactions with patients are down 60%, we've seen new starts not drop so much in the U.S. Globally, we've built a lot of capabilities as well. The ability to have virtual sales calls with physicians, virtual trainings. We spoke to thousands of virtual trainings in just a few months globally. So we're real happy with the capabilities and scale that we've built and just need physicians to scale up and get more patient interactions as they're getting.

Travis, one piece of insight there, which I thought was interesting is, Bret and I have both sat in on -- or kind of observed these virtual trainings. And I spoke to this on my call. I had sat through one with Colton and his parents. So a first-time family converting their son from multiple daily injections to Omnipod. And Bret, you said on one that was a type 2 patient converting.

Correct.

So I think what's interesting about telehealth is it really looks like it's durable and like it's effective across multiple patient segments.

Since you think it's durable, just how do you think structurally, that's going to change things? In some ways, it seems a lot more efficient to me. And so is there an opportunity that you could even train even more patients? I don't know how big of a gating factor that's been in your business model. But just curious on how to think about the impact of this longer term?

Yes. That's really a good question. We -- it hasn't been a gating factor for us to date, but we do look at it as a much more efficient way to train patients. So the capabilities that we've built will allow us to train more patients. And this started for us really in earnest when we launched DASH. So historically, we've always trained our users face-to-face with live, and we provided that for every new start. When we launched DASH, we directed any patient that was converting from our legacy product to online modules for training so that we didn't have to provide those face-to-face trainings. Many of them took those online modules. Some didn't take any at all as the product was very intuitive, and they could figure it out, coming right from our legacy product. But we do see telehealth is something that's advantageous for scale. It's a better experience for patients as they get trained in their home setting. We can provide more of those as we look to scale and grow with the launch of Horizon. So it's a great capability. I think physicians were kind of forced to get comfortable with it too, which -- they would certainly prefer a face-to-face training prior to this pandemic. And they've allowed us to do these virtual trainings, and I think they're really pleased with the results. So it's a capability we're glad we have.

All right. That's great. And then, Wayde, did want to look at one kind of more shorter-term question. I hear all these comments about telehealth and how easy it is. And then I look at your guidance for new patient starts relatively down 50% to 75% year-over-year -- or not year-over-year, but versus your original guidance for Q2 and then improving over the year. I don't know if there's any -- if that's just conservatism or if that's what you're seeing in here early April or early May, or late April, early May. Any kind of color that you can provide on recent trends would be great, too?

Yes. Sure, Travis. Happy to give some insight. And we're not updating from our Q1 commentary, but we can certainly provide some details here and make sure everybody understands what we were communicating. And the purpose of holding guidance for us and communicating was mainly driven by the fact that we have this durable revenue model, and we're continuing to show strong growth, as you mentioned. Even though the sales pipeline started to drop off at the end of March and into April, we still had strong growth in Q1. And that's really the benefit of strong new patient starts through the end of 2019 and through the first part of Q1. And we've put up strong guidance for Q2 because given the durable model here, the annuity model, new patient starts impact the quarter about 10% of revenue. And so even if we have no new patient starts, the impact is muted in an individual quarter. But what we wanted people to understand is, if we go through several quarters of reduced new patient starts, that could create a headwind for the business and will create a headwind for the business. And there's a compounding effect there. So I want to make sure [indiscernible] have a very strong Q1 and a strong guide for Q2 if the pandemic persists, and we measure that in 3 ways, but 1 in particular, the new patient starts that you called out. So I wanted to make sure people understood that we think the biggest impact will be through March, April and Q2 and that, that will impact new patient starts in Q2 and then into Q3. And then we do -- or we did set base assumptions to what we're seeing in the macro environment, which is a gradual reopening, and we're assuming that, that will continue through the end of the year. And we don't think it's conservative, and we don't think it's aggressive. We intentionally set a base case so that we could help explain where our guidance comes from. And that assumes that we'll continue to see headwinds through the end of the year. But you're right that this telemedicine -- telehealth activity has significantly picked up. It's difficult to know exactly how much that's going to offset customers or patients who either can't get to their endocrinologists for a prescription or are just hesitant to get their -- to their endocrinologist for a prescription. And so we wanted to set that base case, and it's like a stake in the ground, and it gives us an opportunity to talk about our model as well as talk about how we progress against that model through the end of the year. The other 2 metrics to watch is utilization, and we tick that down a little bit just with the recessionary environment in front of us. We assume that some people may skip or push out orders and then we also ticked up attrition, assuming there may be some people that drop off the product. Having said that, we have great retention and our customers stick with us for a long period of time. So we didn't make major adjustments to either of those metrics. And so a couple of the things that we're tracking that are not baked into the guidance is, is there a bolus? We get this question a lot, are there people that normally would have gone to their physician or the clinician and got a prescription and got better treatment or better therapy for their diabetes? We can't estimate that right now. It's difficult to assess. And so we've not factored a bolus into our guidance. And then the other tailwind that we're tracking is given the pandemic's impact on people with diabetes, there's a chance that people with diabetes become desire treatment more than they would have before the pandemic, and it creates some additional demand out there because people with diabetes, people who are potentially out of control, in particular, type 2s, who need better treatment are looking for. And so those are the things that we're thinking about as far as guidance, and we'll be keeping people up-to-date as we move throughout the year.

Are there any early stories? And maybe -- I'm sure they're pretty anecdotal, but a patient who maybe haven't been on a pump that now, in COVID, are more concerned and so they're calling their doctor and are coming into your leads, your sales channel and saying, I need to get on a pump, just to be a little bit more prepared.

Travis, yes, we know that diabetes is the second most common risk factor with COVID-19, apart from cardiovascular disease. And so there is a heightened awareness and attention to control with patients now. And that could be some of the reason why we saw tremendous diligence from patients in Q1 to take an order. Our volumes were really strong from our base as patients made sure they got their orders, made sure they had supplies. And so certainly, we're seeing it there. The new starts, just more color around, patients that start on Omnipod, we've got tremendous telehealth capabilities. We're doing a nice job with virtual trainings. We're getting physicians comfortable that we can take that burden off of them, their understanding that they can start to bill for telehealth. And so all that's progressing. The real thing that we're just watching are just the interactions with patients and the number of physician and patient interactions. So as that scales, we'll see some improvement. But certainly, yes, diabetes is one of the reasons why endocrinologists have been really keen to adapt telehealth very quickly. Telehealth has, historically, been a mental health bill for a lot of psychiatry and psychology and not a lot from endocrinology, but endocrinologists have really progress quicker than more specialties. And I think that's because of the concern with diabetes. So there could be a bit of a lift there. But again, it really is about, for me, patient interactions that's driving new starts. So we just need more physicians to get more comfortable with telehealth.

And then -- that's very helpful. And Wayde, you mentioned you're still going to be -- potentially in a position to maintain the $1 billion in revenue by 2021. But you put the caveat that assuming market dynamics normalize. So just curious, what has to happen in order for you to get to that $1 billion in revenue? Because it seems to me if you can still do your guidance for this year at 15%, then you really don't need a heroic year for next year to get to that $1 billion in revenue?

Yes, that's correct, Travis. So that's how we're thinking about it. We've got a 15% guide for the total company for 2020. And that means that we'll have to be in the mid-teens to high-teens growth rate to get to that $1 billion in 2021. And the way we're thinking about it is if we see a gradual recovery throughout 2020, that means that we will see 50% of our planned new patient starts in Q3 and 75% of our planned new patient starts in Q4, and that starts to refill the pipeline of new patient starts and building that year-over-year annuity or annualization. And our assumption is that when we get to Q1 2021, we're back to a normal cadence of new patient starts or we could call it a new normal. Whatever headwinds persist, they're now being offset by telehealth. And so we can think about getting back to a normal new patient start growth similar to the momentum that we came off 2019 and our original plan for 2020. And if we get back to those normal new patient starts, we'll continue to accrue and grow our revenue growth rate back up. And so we think about 2021 kind of as a mere image to 2020. If we see reduced new patient starts in the second half, that will impact the first half of 2021. And if we see normal new patient start uptick in the first half of 2021, that will feed the second half and get us back to our strong growth rate -- run rate.

Okay. And then you'll be much closer to Horizon, which is kind of the next topic I wanted to move to. You -- obviously, because of COVID, you had to delay it maybe by a quarter from early 2021 to first half and a lot of that converting the trial protocols over to virtual methods. Just curious if you could provide a little more color on what exactly has to happen for the study? And how complicated that is? And any sense for what you're assuming on FDA review time lines as well?

Sure, Travis. Yes, we're obviously really excited about Horizon and working very hard internally to make sure we don't lose ground there. I think the team actually did a remarkable job considering all the challenges that came in March as we were wrapping up all of the software work to get this over the finish line was quite remarkable and very exciting for us. The challenge is, obviously, we are now predicting some delay in terms of our back and forth with the FDA just given the environment and then also some logistical challenges that we're contending with in terms of getting the trial back up and running. And so what happens, the protocol needs to be updated, and that's the study protocol. So today, prior to COVID, in the study, patients were coming back in on a semi-regular basis to have their data reviewed and complete questionnaires and other data collection efforts. And so obviously, we don't want that to have to happen. We want all that work to be able to happen remotely in a telehealth fashion. So the study protocols have been updated. Those are under review at the FDA. We don't anticipate issues there. And then once we are back up and running, we have to contact all of the sites and through the sites, either update -- and this is really a patient preference issue, either update the software on the existing PDM and/or provide them with a new PDM. I think I said on the call that virtually all of the sites and virtually all of the patients, so 240 to 250 patients, all but 2 patients are expected to continue with the trial. So that's great. And most of them, I think somewhere north of 80% of them are using Horizon in open loop. And so it should be a pretty straightforward effort to either replace their PDM with -- one with the software fix or update their software. We were -- when we paused the trial, we were almost halfway through. So we had about 9,000 patient-wearing hours completed. And we expect to get 21,000 under our belt before submitting to the FDA. So we simply resume once we have updated the training for the sites, the remote health care protocols. And once we've updated everybody's software, we're kind of off to the races then. And then we would expect to wrap that up, spend some time compiling the data and the submission and then submit that to the FDA for clearance. So we're fully committed to doing that as quickly and efficiently as we can. We know that patients in the trial are very eager to resume their time with Horizon, and we certainly know there's a great demand in the marketplace for it. So -- and we believe that we're in a kind of a fortunate position as far as clinical trials go in this environment because it was a home-base study. It's fairly easy with our capabilities to support remote monitoring and remote care for these patients. And because we were already fully enrolled -- in fact, overenrolled and so because there's so much enthusiasm, we do anticipate that this will be a, hopefully, a relatively smooth resumption of the trial.

Yes, I hope so. I know a lot of patients are really eager to get the product. It was on a webcast earlier this week, and patients were, the number one question was when is Horizon coming. So I know there's a lot of built-up excitement. Are we going to see pre-pivotal data at ADA this year? Anything else that we're going to see at ADA? And then what's the updated timing for the Horizon pivotal data? Is that still likely later this year at one of the other diabetes conferences?

Yes, that's exactly right. You will still see pre-pivotal data at ADA in whatever virtual format makes sense for us at that conference, which has gone virtual. And then we'll look to a conference later this year to get the pivotal data out once it's completed, and that will probably be late this year.

Okay. And then a lot of people kind of think algorithms are kind of the same, as long as you get to a certain common range, then basically the same thing. But is there anything that when you're on the market with Horizon in terms of the software side of things that you would really highlight is a competitive advantage and how you're going to position the algorithm specifically?

Yes, I would highlight 2 unique advantages of our algorithm. And the first is sort of the way that the algorithm and the system work together. And that -- I guess, maybe 3 advantages. I'll start with the first one, which I think most people are familiar with. But we evaluated all of the algorithms on the market before selecting and acquiring our algorithm from the University of Santa Barbara, California. And what we liked about it was its capabilities, its ability to grow over time and its ability to be compressed to be able to reside on the pod. And so the first thing that's unique about the algorithm really is that it resides on our small wearable pod. And there's some significant advantages there because it means that we should be able to deliver a longer and more time in loop for the patient which means that they'll get the benefit, a more and more durable benefit of closed-loop therapy. So that's number one. Number two is really how the algorithm and the system work together, and that is that our system, we call it microbolusing or microdosing. So rather than set the patient at a typical basal rate and then correct up or correct down from there, which is how some of the other systems work, what we do is look out an hour, and every 5 minutes, adjust the tiny bit of dosing of insulin that you need. So there's no more real basal rate. It's just a constant micro-bolusing. It's really very similar to how your pancreas works. Just tiny little doses of insulin throughout the day, all adjusted based on where your glucose is going. So that's kind of a unique way that it operates. And then the last thing I'll say about it that we think there's all sorts of benefits that this will translate into. Some are public and some aren't. But the algorithm is personalizable and that can mean a lot of different things to different people. The way that I like to characterize that is if we think about our pediatric segment, we're the #1 used pump in pediatrics. And our users grow with us over a lifetime. And so their insulin needs change, for example. This system is designed to adjust insulin based on what's happening with the user's blood glucose and management. So it will really grow in its functionality without input from the clinician or the patient in terms of how it's adjusting its management of that patient's insulin needs. The same thing could be true for a patient -- an adult patient. We're also very popular with active users. So somebody who has adopted a new exercise routine, for example, on a regular basis, the system is designed to adjust accordingly. So those are just some examples. I think the great thing about the algorithm that we acquired is it's really exciting technology. It's technology that I think can grow for us with generations of Horizon because we do view this as a platform that we'll continue to bring more value, more ease of use, more simplicity to users, both type 1 and type 2 over time.

And we're all looking forward to seeing it on the market. That's a great overview. I did want to move over to the international side of things. Just curious if there's any more color you can provide on the U.S. launches. I think you delayed those a little bit, given COVID. Just what has to happen on the ground and to get those countries open and how to think about the opportunity there once they do open up?

Yes, Travis, this is Bret. So just a little more color on that. We were targeting the end of this year for up to 5 additional markets and said with the current environment, it's likely the first of next year when we'll launch those markets. They are -- as we look at the market, we were pretty comfortable with the markets that we've identified. There are markets that have favorable reimbursement. There's still work to do for the regulatory pathway to get the products licensed in our market. In some cases, there's work to do with languages. We'd like to launch DASH in those new markets. And so some might require new language. But we're going to use the infrastructure we've built in Europe with our European office and kind of just parlay that into some of these markets. So these markets will be in Europe and in the Middle East. And so that gives you an idea of those markets. We're in the largest markets really already in those areas. But languages and some work with regulatory and we'll be off and running, probably the first of next year at some of these.

Yes. How do you think the international markets play out? I see like 2 dynamics: one, you've got the endos in the hospital. So like near term, there could be a little bit more of an impact on the patient starts. But longer term, if there's a recession, like there's fewer commercial coverage patients outside the U.S., more government-funded health care. Any thoughts on the durability of the international markets? And I know it's probably differs country to country, but any thoughts there would be great.

Yes, you called it out. So first of all, the difference that it makes in our business takes time, right? Because we don't bill -- and likely we don't bill a lot upfront in those markets. And so it will be the same recurring revenue model that we've got today in many markets. So it takes time to build the user base, that will really impacts the overall revenue. But you mentioned this, the payers outside of the U.S. are primarily government entities. And so that creates -- once a patient does have access and it's not always good in all markets. Sometimes there's age limitations and things like that. But once you do have access, you're likely to have access for life. And so that's why some of the financial systems programs that we've rolled out that we are really excited about in the U.S. and in Canada, we didn't see some of the same need in Europe because many of those patients, even if they lose their jobs, will have access for life as they're government payers. So you get some of that lower attrition and better access once you get patients to a product, but there can be challenges with starting the patients depending on the market and the dynamics of each.

That's helpful. In the last couple of minutes here, Wayde, I did want to ask about margins and near term, just trying to get a better understanding of the inefficiencies in the current environment on the manufacturing side. I know gross margin is, obviously, a little more pressured. I'm just trying to get a little more color on exactly what those inefficiencies are during this period?

Yes, Travis, sure. So just to state what our guidance is now. We took it from consistent to last year at 65% down to 63%, about a 200 basis point reduction and you can split that. Half of it is related to the onetime costs we have for COVID-19. We spent extra money for safety and for mitigation and for ramp-up in our China manufacturing facility, first early in the quarter as it was challenging to get people to the facility and get them to the facility in a safe way with all the mitigation that we put in place. And so we also shared in the cost with our third-party manufacturer to help them get up. And then another component was just the fact that we didn't have enough volume through the plant to absorb costs. And so we had to take that to the P&L in the quarter. And that was about half of it. The other half will come here in Q2 and a little bit through the rest of the year. A smaller component of it was our U.S. manufacturing mitigation and safety efforts, but we did spend some money there as well. The 2 components of it is, one, reduced volume, that's pretty straightforward. We've taken down our revenue. And so we've taken down the volume assumption. And then third, what's challenging in our U.S. manufacturing facility is, as you know, a lot of work going on to ramp up our new U.S. automated manufacturing lines, and that's really challenged by 2 things. One, the teams pivoted to focus on safety and mitigation efforts and making sure that we could get people into the facility safely and all the new protocols. And two, we had third-party experts and third-party consultants that were working with us on those lines traveling from outside the country. And so they obviously can't travel to the plant right now. Our third manufacturing line is being built at their facility. And so our teams can't get up there. And so it's just caused some challenges working on the lines and then as well as working with our suppliers. A lot of work goes on working with our suppliers to customize components so that they're set up for automation. And so a lot of that work has really slowed down as teams aren't able to travel to different facilities and work on the products.

Great. That's a great overview. And unfortunately, we are out of time. And thanks a lot for joining us in our Virtual Vegas. And hopefully, next year, we'll see you in person. Thanks a lot.

Terrific.

Thanks.

Thank you, Travis.