Insulet Corporation (PODD) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Piper Sandler Virtual Diabetes Day with Insulet Corporation. [Operator Instructions] It is now my pleasure to turn the call over to Matt O'Brien to begin. Please go ahead, sir.

All right. Thank you, Maria. Good morning, everybody. Thanks so much for joining us today on our Virtual Diabetes Investor Day. This is Matt O'Brien from Piper Sandler's MedTech research team. We are extremely pleased to have Insulet leading us off here today. From the company is Wayde McMillan, the Executive Vice President, CFO and Treasurer; Bret Christensen, Executive Vice President and Chief Commercial Officer; and then Deb Gordon, Vice President of IR. This is a webinar, so we cannot get questions telephonically from the audience. [Operator Instructions] With that preamble out of the way, let's go ahead and get started. Wayde, Bret and Deb, thank you so much for joining us this morning.

Thanks for having us.

Yes, thanks for having us, Matt.

Of course. I wanted to start with the economic situation here in the U.S., obviously, very dynamic fluid situation. But you said you expect the new patient adds in Q2 to be down 50% to 75% on the last call. So what needs to happen for the low end of that range to occur? What needs to happen for the higher end of that range to occur? What did you kind of think about when you were setting those numbers for investors?

Yes, Matt, I can start that one, and then hand it off to Bret for anything he'd like to add. And I think it's a great place to start, just given the impact of the pandemic here, and it certainly is a disruption to the business. We had incredible momentum in 2019 coming into 2020. We had record new patient starts almost every quarter in 2019. And in fact, even with the impact of COVID-19 at the end of Q1, we still had record Q1 new patient starts in the U.S. So a lot of momentum coming in. And when we look at the key metrics that you're asking about and what are the impacts to the business, we see new Omnipod starts as the biggest short-term impact, and that's something we monitor closely. We also monitor utilization and retention. We think those are 2 other key metrics that are in play given the current situation. And so we have a very durable model, and what we mean by that is approximately 10% of our sales in a quarter, only 10% of sales in a quarter for us comes from new Omnipod starts. The majority of revenue comes from that recurring annuity revenue model for our customers continuing to order the product. And what we saw at the end of Q1 in March and continued to see into Q2, as we said on our Q1 earnings call, is that the pipeline of new Omnipod customers coming into our pipeline dropped off significantly. And that's driven by the ability for customers to meet with their physicians and get prescriptions for new starts. And so what we then laid out was what we thought was a good estimate on what we will see for the Omnipod starts in Q2, 3 and 4. And we paired that with an expectation that we'll see a reopening of economies and gradual improvement through the end of the year, but we did not anticipate getting back to full Omnipod starts as planned at the beginning of the year until 2021. In other words, we'll continue to see a headwind through the end of the year. And as we've gotten into it, we know that TeleHealth will be a major offset. And we think that that's going to somewhat change the adoption for customers. And so that's a tailwind that we think will help on the positive side of things inside of the range you asked about. We also see a bifurcation between the dynamics in the U.S. and the dynamics outside the U.S. Starting outside the U.S., most customers are in government-sponsored plans, and we don't see unemployment and recessionary impacts hitting customers outside the U.S., like we will in the U.S. And also, outside the U.S., the clinics, endocrinologist clinics are primarily in the hospital setting. And so we see them more at the high end of this range, 75% reduction in new starts in Q2 and a stronger headwind or a slower recovery through the end of the year outside the U.S. because of that factor. But the recessionary impacts, we think, will be less. If we contrast that to the U.S. then, given that many endocrinologist clinics are stand-alone, we believe that they will adopt TeleHealth faster. They will find ways to meet with customers quicker. And we see the U.S. at the lower end of that 50% to 75% range in Q2 and still with a headwind through the end of the year but to a lesser extent than we did outside the U.S. And so that's what we wanted to put together, Matt, and everybody here to be able to give us a stake in the ground, to be able to talk to as we progress through this thing. And it does a couple of things for us. Number one, it demonstrates the durability of our model. We're going to continue to have a strong Q2 because of the momentum that we had coming into the second quarter. And then depending upon how many quarters we go through where our new Omnipod customers are challenged getting their prescriptions and getting to their endocrinologists for those prescriptions will dictate how strong this headwind is. And if that happens, that will compound and push our growth rate down for a couple of quarters. But again, with the durability and the annuity nature of our model, we will again start to pick up momentum and build into momentum for 2021. So that's really how we got to that range of estimates for Q2. For Q3, we think it's going to be approximately a 50% reduction in expected new patient starts and then 25% for Q4. Clearly, those are just estimates, but we thought they were logical based on the macro factors and what we know about the customer base. And then it will give us a stake in the ground to talk through and help people understand our model as we progress through these quarters and how impacted they are by the pandemic.

Okay. That's really, really helpful and very fair, again, super dynamic situation. Nobody has any ability to really call in any kind of experience through this kind of situation. But you mentioned the durability, the annuity component of the business, which I think is critical for you and others in the space right now. But the one thing that -- again, I'm not sure how you factored this in as you guys were looking forward. But -- and forgive this question, there's a lot of numbers here. But 37 million people since COVID started have lost their jobs here in the U.S. If just 1% of that group are type 1s or MDI diabetics, which is probably about right, that's 370,000 people now that have lost their jobs. If 30% of that group uses insulin pumps, that's about 120,000 people that just lost their jobs. And not sure how they're going to get coverage or pay for their Omnipods, but you've got high teens market share here in the domestic pump market. So you've got 120,000 people in total, not all of them are Omnipod users. But you just had maybe 20,000-or-so, something like that, of your existing patients lose their jobs. How does that affect you? How can you mitigate the impact of the economic impact to those patients that have lost their jobs?

Yes. Matt, it's Bret. I'll start with that one. So at the very beginning of the pandemic, our focus was immediately with the base. Because of what Wayde said, that the majority of our revenue comes from the existing base, this is where we started with our concern and focus. And so one of the things that we knew going into this was that our current model pay-as-you-go, with really predictable out-of-pocket expenses in the pharmacy gave us a leg up anyway and mitigates in some ways against pricing pressures and some of the concerns with the -- with unemployment. But in the event that somebody loses their job, that becomes a concern for us. And so we're really quick to enact a financial assistance program. I think we were the first device company to launch a financial assistance program with a COVID pandemic in mind. So we had a financial assistance program for years, which many device companies did not have, but we tailored it for this new environment, so that anyone that lost their job due to COVID-19 was eligible for 6 months of free Omnipod. And what we think that does is, first, they can exhaust their COBRA benefits if they have them. If they don't have COBRA benefits, many of these individuals will be eligible for Medicaid. And we'll have Medicaid coverage. We've done a lot to really accelerate Medicaid access over the years to the point where you have 70% of Medicaid covered lives covered for Omnipod. But if they don't have COBRA, they don't have Medicaid, there's this financial assistance program, which we think is very aggressive. We believe it's the best program in the industry where this user can stay on Omnipod for 6 months, while they're looking for a job and gaining employment. We hope that does is that it enables people to not have a disruption in coverage and in service as we want people to continue with Omnipod throughout this until they could get back on their feet.

Okay. Okay. That makes a ton of sense. Bret, you talked a little bit about the pharmacy. Given that there's not as much of an upfront costs going through the pharmacy to get access to the pod, is this a situation where we could see a little bit more increase in that churn than you would be expecting? And then even before COVID, the churn, I was always worried about it being elevated because of the pharmacy channel that didn't happen, so can you just talk a little bit more about why that is the case, why the churn has been so much lower than kind of anticipated, especially through the pharmacy?

Yes. So you're right, Matt, with the pharmacy channel, we aren't charging upfront, and therefore, we aren't locking a user into a warranty period where they can't switch technologies. But remember, that was never that important to us anyway because we really do earn our revenue every 3 days with our users if they stay on Omnipod. If they stop using it, whether they stop using it or go to a competitive product, the effect is the same on us. But when we made the decision to go to the pharmacy and to not use this 4-year lock-in period, which we know is in the best interest of patients, we already have really good insights into the behavior of Omnipod users. Because for years, we were the DME channel. And technically, we were locking patients into a 4-year warranty period, but what we weren't doing is actively relocking them in. So we weren't actively renewing those warranty periods because there wasn't as much benefit for us as we weren't getting as much upfront. So we saw in our data that users, even though they weren't locked into a 4-year period with Omnipod, they also weren't dropping Omnipod. They weren't switching to competitive products. We always call out that we have the best retention and lowest attrition in the industry. So we knew all that going into the pharmacy channel. And so what we did is we just made it official. But we knew that we already had strong retention that, that shouldn't change in the pharmacy channel. So while you're right, users can switch or can stop using it. But we know that we've got just really strong retention and that's not likely to happen. And so we've seen the pharmacy channel as just a real benefit to patients, physicians, to payers, and we haven't seen that uptick in attrition.

Okay. And Matt -- sorry, go ahead.

If you'd like, I can add on a couple of things that Bret said here, which I think are really helpful, in particular, in the U.S., and they translate into, as Bret said, utilization and retention metrics. So I just want to remind everybody that we did put a tick-up in attrition and then ticked down utilization in our guidance as well because we think those are 2 other key metrics. And what drives us to the high or the low end of the range on those will be the impact that Bret just articulated, particularly in the U.S. where unemployment is correlated with coverage and the ability to pay for health care expenses. Obviously, that's less of an impact outside the U.S. But in aggregate, a global recession and an ability to pay could have a negative impact on our business. What we're tracking here, though, are a couple of other dynamics that I think are good for people to understand. On the negative side, as we just talked about, how impactful will the global recession be or expected global recession. On the other side is we're monitoring the bolus of patients. Obviously, there's a number of patients that have wanted to get to their physicians and improve their therapy. And they've been on hold now for a few months. And so we're monitoring the extent to how much that could impact the business in the near term. And then we have all seen the reports about how challenging it is for people with diabetes when they contract COVID-19. And we think that, that will drive an increased awareness. So a couple of things on either side of the ledger there that we're monitoring to just see how much of an impact we will have on our business.

Has there been anything that you'd really call out that surprised you either positively or negatively through this process in terms of lower attrition than you may have thought or potentially less cost on other products at the moment that makes it easier to stay on Omnipod? Anything like that, that you could call out either positively or negatively?

Nothing yet. And I can start that one, and Bret, you may want to weigh on in this one as well. I think it's too early to tell at this point, Matt. We've had really strong performance, as we said, through April, just given that our pipeline was strong coming into the quarter. And we haven't commented beyond that yet, just given that we've just gone through the month of May, and we don't have any update yet. It's really just too early. I think we'll get the quarter through Q2. We'll pull all our data together and take a look at it and see where we stand at the end of the quarter.

Okay. Bret, did you have anything else?

No. I think -- and we called this out on the earnings call, but just the diligence that patients have in filling a prescription. So that gave us a bit of a boost in Q1. We've just seen patients make sure they fill their prescriptions, fill them as soon as they can. And so all of that is really kind of attributed to some of the volume that we saw in Q1, and we'll see how that goes for the remainder of the quarter and for the rest of the year.

Got it. That's helpful. So let's flip over to Horizon. Everybody is excited about it. Obviously, new product cycles in diabetes are always extremely exciting. That said, forgive me for this, too, but when I hear software glitch, it always makes me nervous. I've covered the space for 16 years now. And these glitches happen. They just always tend to take longer to fix than anticipated. You've said you've got the problem resolved. But did you identify the root cause? How difficult was it to fix? And then just what gives you all the confidence that you need there's not going to be another issue on the software side of things with Horizon?

I can start with that one, Matt. So I guess, what gives me confidence is much of the fix for the glitch you're referencing with Horizon was taking place in this work-from-home environment. And so what the -- our product development teams, our coders were saying was they did probably see an improvement in productivity. I think anytime you can let a team like that get focused and not get distracted. And so work-from-home environment probably even helped us in some regards there as they might have been in fewer meetings and had fewer distractions, and they could really just kind of focus on the glitch and fix for it. So we did comment that we've got a fix for it, and that's in. But I think that just the fact that we were able to do that in the environment that we're in gives me a lot of confidence in the quality of that fix and where we're at.

All right. That's helpful, Bret. Okay. So that all makes sense. You mentioned it's delayed until sometime in mid-'21. That delay is kind of in line with other MedTech companies. So that's not too surprising. But can you talk about the rollout of that product once it's available? How are you going to go about rolling it out? I'm sure you'll go fairly slowly for starters. And then is it fair to think that it's more of a 2022 contributor? How do you mitigate disruption as people are waiting for it? Just a little bit of commentary about that, please?

Yes. I'll start with that one, too, Matt, and Wayde you can -- you could talk a little bit about what the impact that it may or may not have and the timing of that. But when we roll out Horizon, we'll do it in a similar fashion that we did with DASH. And so we will start with a limited release. If you remember, our limited market release for DASH was about 6 months, and there was a lot going on. So at that time, we were moving really completely from a DME channel to a pharmacy channel. We're establishing new contracts with new contacts that we have not had in the past. So PBMs, pharmacy wholesalers, retail pharmacies. There was a lot of work being done with access in pricing. We were moving from an upfront fee to a complete pay-as-you-go model. So we were educating the payers and really selling the value proposition of that. So there was a lot of work being done for the rollout for DASH. We were also, for the first time, doing self-serve training. So anyone that was on our legacy Omnipod product and moving to DASH was able to go online and see virtual training and not have a face-to-face training for the first time. So it was a real jump for us going from Omnipod to Omnipod DASH. I'd look at Horizon is actually less of a jump, even though we're going to be adding CGM into the mix and some of the complexities that are there with training and support. Much of what we did with DASH is going to really help us. So we will launch it a limited release, but we will already have this pharmacy channel established, so we'll have agreements with wholesalers. We'll have the agreements with retailers. We'll be able to get the product into the marketplace much quicker. We still have to negotiate contracts. So we have to add this to formularies. We have -- we still haven't decided on a pricing model yet, but we're weighing the trade-offs of a price premium for Horizon that we believe it probably warrants. But at the same time, there's a thought that if we launch with price parity to DASH that we can gain access much more quicker and therefore, adoption much more quicker. So we'll decide on that and have a clearer plan in the coming months for that. But the channel, the access, all of that should be much quicker. And probably the biggest difference is just going to be the addition of CGM and how do you triage support for some of those users as they call in. Is it a CGM issue? Is it a Omnipod issue? And then how do you triage that. But we're working very closely with Dexcom on that. We think we've got a good plan there. But I think much of the learnings from DASH are going to help us tremendously when we launch Omnipod with Horizon.

Yes. I could -- I'd just probably add a couple of things there, Matt. As Bret said, we learned a lot with DASH. And so we've got both the good understanding of our own capabilities. And then, as Bret said, just our close working relationship with Dexcom, we feel we've got a good lead time on that. For Horizon, it is a game-changer for us. We believe that today, we compete very well with our current technology and form factor. But clearly, we don't have AID and the automated, integrated CGM capability, and we think it will level the playing field significantly when we get there. And we can't wait to get there. Just to confirm our guidance, what we've put out there is first half 2021 and we gave ourselves some room just given the current challenge of operating under the pandemic here. We wanted to give ourselves some room, given that to be able to make sure from our previous guidance of early '21, the first half '21 to account for any of the timing challenges we may face here, but we are incredibly excited to move forward with the pivotal. We feel fortunate that we were in the middle of the pivotal trial. We're fully enrolled and moving forward. It was already a from-home study. And like others who may have to wait to start the trials, the fact that we had started and are moving forward here is -- gives us a lot of confidence in this time line.

That's very helpful. Okay. So a question here from the audience. They said in the past that they will be giving a free Android phone along with Horizon, can you clarify that comment?

Yes. What we've said with Horizon is that we would give a PDM. And so it's an Android platform. And we will, when we launch Horizon, it will have a phone control with Android. So a user will be able to decide whether or not they want to use their PDM or carry their PDM around. They'll be able to control -- if they have an Android mobile phone, they should be able to control Omnipod with their phone. But we will give a PDM to every new start with Horizon. So we'll haven't -- just like we do with DASH today, we'll have an Android device that is locked down that we will give to every single user. And then those users that have an Android device that their smartphone may choose to download the Omnipod app and control Omnipod from their phone.

Got it. Okay. That's very clear. I appreciate that. So ADA is in a few days. We're going to be getting your prepivotal data on Horizon at ADA. What should we be looking for there specifically? And then I think you also have some pediatric data coming out at the conference. Beyond that, anything specific to look for from you guys at ADA here in a few days?

Well, we've got a number of submissions. And one thing I'll just highlight is that it is a subset right of the earliest of our clinical trial. So it's a subset of the prepivotal that we will be showing at ADA. So I just -- I think I would point to the pediatric population there and just a small subset and breaking those 2 out, but that's something that we'll show at ADA. We're excited to start to show those data. We'll have some interesting data on type 2 patients at ADA. But yes, it will be really interesting this year as it's an entirely virtual show. We'll have a virtual exhibit, and we'll be talking a lot about Omnipod 5. We'll also be talking a little bit about what we get with the next version of DASH, which is an automatic upload of data to Glooko. We think that is a -- it's always been a feature that has been in the works. But in this new TeleHealth world where physicians do less to actually see the data in a virtual call with a patient, it's going to be tremendous. So we've got a lot of really exciting things that we'll show at ADA in this virtual conference setting.

Okay. Excellent. Looking forward to it all. Just a couple more here before we hit the bottom of the hour. [Operator Instructions] Equity raise, some people may have viewed you raising some equity here a few weeks ago as a signal that your stock is overvalued. How would you respond to that comment? That's what I've got from a few folks.

Not at all, Matt. We can't time these things. And we believe we're going to drive significant value over the long term here. So our position here was -- or our decision was based purely on capital planning. And given the COVID risk, we wanted to, number one, strengthen our balance sheet but also mitigate against what could be a more challenging environment. We had also recently financed with the convertible last September, and we have another convert our 2024, so maturing 2024 is that are in the money on a second convertible. And so we felt that this was the right option for us at this time. And for us, we know that we've got a great market opportunity here, a real opportunity to make a difference for customers. We also feel we have a very strong position in that marketplace. And we know that we had a lot of momentum, as I mentioned earlier, coming into 2020. And we know we'll have a lot of momentum when we come out of this pandemic. And so we wanted to make sure that not only could we sustain whatever downside scenario that pandemic could bring, but we wanted to have the strength of balance sheet to give us the confidence to lean in and continue to hire the talent that we need and continue to make the investments we need and potentially go on the offense like we did with our financial assistance program that Bret mentioned. And make sure that we're doing all the right things for our employees and our customers and that we can endure really any downside scenario and come out the other side of this even stronger. So that was the idea, certainly not a timing thing. It is all about the options that we had in front of us, our current capital plan, and that we wanted to strengthen the balance sheet at this time. That's it, Matt.

Got it. It makes total sense. So we've just got a couple of minutes left here. Anything you want to discuss on the Libre partnership with Abbott, how that's going to roll out? And then nobody seems to ask about drug delivery anymore. Is there anything there that we're just missing and forgetting to ask about?

Yes, Bret, do you want to take Libre? And...

Yes. I'll take Libre. So yes, our vision, Matt, as you know, is around interoperability and patient choice. And so we're extremely excited to launch Horizon, Omnipod Horizon with Dexcom G6. And we announced just the -- at the beginning of this year that we had a new partnership with Dexcom, our expansion of that partnership where we would add G7. We also announced a partnership to begin integration with Abbott for Libre 2. And so this is just really consistent with what the FDA wants to see with interoperability. Patient choice is what we believe in. As you know, we've also announced our partnership some time ago with Tidepool. We want to be in the business of selling the pod and making sure that Omnipod is a best-in-class insulin delivery device. And we want to allow for patients to choose a sensor and potentially even an operating system where they can. And so we're excited to add both G7 and Libre to the mix. We know that, that keeps our market as big as it can be. We know that they both offer unique things to different patients. We know that Abbott is a leader in Europe where we reside today and plan on expanding into the future. And so we're just really excited about both partnerships and can't wait to get integration with all of those CGMs into Omnipod.

And I could pick up on that drug delivery here the question for you, Matt, and it is really all about portfolio prioritization. We've seen with our current drug delivery partners the power of the pod and the ability to use it in other areas. However, at this point, just given the opportunities in our prioritization for diabetes, we see those as the highest priority and are obviously going to direct the majority of our investments there. What I would say over the long term is -- and we continue to evaluate programs today. And we view additional drug-delivery platforms as growth options for us in the future, potentially strong cash flow options for us in the future. But we're not talking about any right at this time because we're just really focused on delivering on our diabetes strategy here. And at this point, not talking about any additional delivery platforms.

Got it. Okay. Well, we are at the bottom of the hour and out of time. So I'm going to go ahead and call it there. Thanks so much for the time this morning, and all the feedback has been really helpful. And best of luck to you guys and all your employees as we come out of COVID.

Thank you, Matt.

Thank you, Matt.

All right. Thanks, everyone. Take care, okay?

Bye-bye.

Bye-bye.

Thank you, ladies and gentlemen. This does conclude today's webinar. And you may now disconnect.