Insulet Corporation (PODD) Earnings Call Transcript & Summary

Good afternoon, and thank you for joining us at this year's Canaccord Genuity Medical Technology and Diagnostics Forum. My name is Kyle Rose. I'm on the MedTech team here at Canaccord Genuity. And joining us this afternoon is Insulet, who is a top player in the insulin pump market with its novel form factor and pay-as-you-go business model. The company recently delivered strong Q3 results and with a new product cycle on the horizon, looks to be entering an exciting period of execution. So with us this afternoon are several members of management, including Wayde McMillan, CFO; Bret Christensen, CCO; as well as Deb Gordon, VP of Investor Relations. Before we kick it off, the lawyers and my compliance team always request that I mention any relevant disclosures, if and where applicable, they can be found in our conferencing or firm website. So with that, I'll jump into some discussion. It's going to be back and forth Q&A with some fireside. So if the investors on the line want to submit questions to the portal, please do so. But I've got a lot here, so they're going to need to be good ones.

So I want to spend the next 20 or so minutes talking about how the company has really evolved over the last 18 months because I think that's important for 2 reasons: one, I think you have a major new product cycle coming with Omnipod 5 next year; and then two, your story has evolved from a pure type 1-focused company to almost a broader insulin delivery story. So I wonder if we can just start with DASH. Bret, that product launched in 2019, really stepped the gas pedal down here in 2020. So maybe help us understand what DASH is and more so, how it's different and where you're at from a launch perspective globally.

Yes. Sure. So DASH was the fourth generation of Omnipod, but a very significant jump in innovation for us as we delivered on the #1 request from our user base, which was to provide a easy-to-use touch screen interface. We eliminated the handheld and got out of the handheld business, really, and moved the platform to a smartphone device which is locked down. So that checked the box of filling the need for our users of providing greater discretion and easier-to-use operating system. But we use DASH as an opportunity to really rethink a lot of things, including the business model, the channel through which we deliver our products. And so we moved, as you know, to the pay-as-you-go model with the launch of DASH. We moved that product to the pharmacy, where we think there are a number of benefits to both users and to physicians. And we also -- it was a stepping stone to Omnipod 5, as you mentioned, Kyle, which we're really excited about is now we're on the Android platform. We're out of the handheld business. We're more into the software side of things, and it's going to provide a much easier path to innovate in shorter intervals. And so we added Bluetooth to the Pod. That capability is going to be instrumental in thinking about future innovations, including Omnipod 5.

And what surprised you the most about the product in the launch? I mean, obviously, it enabled you or seemingly enabled you to handle the dynamics of shifting to a remote environment and the easier onboarding and training of patients. But I mean is there anything that surprised you specifically about the product when we think about laying the groundwork for the Omnipod 5 launch?

I don't know that it surprised us. But we did -- we changed so much with DASH, not just the product, but we -- it was our first foray into the pharmacy channel, which we did a lot of research, and we really understood what it would take to get into the pharmacy channel. We moved to this pay-as-you-go model, gave up that upfront cost, stopped enforcing a 4-year lock-in period with users. There was just a lot of change with DASH. And we also launched DASH into every country outside of the U.S. which we're in this year as well. So we took on a lot with DASH. And I think what surprised me was just it went as smoothly as it did because there's so much change there and so much risk. We knew it's what we had to do, and we're really pleasantly surprised with just how well it's gone. We also -- remember, we by not enforcing this 4-year lock-in period with our users, we understood that we were taking on the risk of greater attrition because it's easy to get on DASH, it's easy to get off DASH, and that's the right thing for users. But we've been really impressed with how well retention has held with DASH, and our users are extremely loyal to the form factor of Omnipod.

And that's a very interesting point. And I want to touch on the transition to the pharmacy channel here. Because when I look back the last 2 years, you've made big improvements in access as well. It wasn't just a transition to pharmacy. In the last few years, you've had UnitedHealthcare came online, broader reimbursement access in Medicare and Medicaid, so when you think about the execution over the last 18 months, is there any single driver that you can really point to? Is it more on the access side? Is it structurally changing the patient process as far as how they interact with insurance and pharmacy access? Or is it just kind of broad tailwinds broadly?

Yes. I think you'd have to look to the sort of the obstacles and the things that we're preventing greater uptake of a technology like Omnipod, and those were an easier to use technology, a lower, more predictable out-of-pocket cost as the pharmacy channel provides, less paperwork and burden for physicians as the pharmacy channel provides. The pharmacy channel really has been instrumental. I don't want to discount the impact of greater technology like DASH, it was a fantastic step in innovation for us. And then the pharmacy channel really removes some of those other barriers like a high upfront out-of-pocket cost, really unpredictable out-of-pocket costs throughout the year. This 4-year lock in period, which prevents patients from moving to greater technology as it's released, that's been a really significant difference in what we've done in the U.S. and look to implement more of that pay as you go outside the U.S., but certainly in the U.S., the pharmacy channel has been a tremendous growth driver for us.

And when we think about the pay-as-you-go model, I mean, I really view that as a structural competitive advantage for the company, in particular. But how do you think about continuing down that pathway when you launch the next-gen system, you launch Omnipod 5? We've seen some of the CGM players push really hard into the pharmacy channel or, in fact, just completely issue the DME channel altogether. Do you think that the company ever completely abandons the DME side of things and you try to push everything down the pharmacy side?

It's a good question. It covers a lot of our business model advantages here. And so happy to share some of our perspective on the structural question that you mentioned, Kyle. And as Bret said, in the U.S., the pay-as-you-go model pairs really well with the pharmacy strategy, and it creates an at-risk model for us. It's been an advantage for Bret's team in gaining access across the U.S., we're at 65% to 70% of covered lives on DASH now across the U.S. And it really is a U.S. strategy, as Bret mentions, very different outside the U.S. And we do feel that now that our volumes are up to 30% in the pharmacy that we're starting to get a real feel for what those benefits are. And from a structural standpoint, it's really paired well with the annuity model as well. Those 3 things work together, our new -- our pay-as-you-go model with an annuity revenue stream in the pharmacy. And what structural benefits we see there are, it's taken us over a decade to build up a profitable business and a number of customers that create a critical mass for us to be able to make the investments in R&D, the investments in selling and commercial. Building out the pharmacy channel took a lot of investment from us, a lot of infrastructure, a lot of selling and marketing investments, access investments, a lot of investment in the team to build out that third channel. So we think those are all structural advantages for us, and we know that it took us a long time to build the profitability where we are today. And then as far as the DME goes, it's an important channel for us today with only 30% of our volume moving through the pharmacy. We do believe the pharmacy will continue to grow to a much larger percentage of our business over time. But for those customers that have access and need access to the DME, we want to make sure we're there to serve them as well.

And you made a few comments about the pay-as-you-go model and no upfront cost for patients in the U.S. It's not lost on me that you took over OUS rights and built out commercial infrastructure internationally over the last several years as well. So you control more of your destiny in a direct way there. So what can you do from an international perspective to drive a similar type of reimbursement and access for patients internationally?

Yes. We're operating today internationally in really in the payment models that existed in those countries. But we are starting to leverage this pay as you go in certain areas. We've spoken about success that we've had in Canada, the province of British Columbia and others. We believe that if we were first to market in these countries that the pay-as-you-go model would be well established. We weren't, so we piggybacked off of this DME reimbursement model that existed in most countries. But as we look to expand to future geographies, and as we look to influence reimbursement in the countries that we're in, we are going to press on the pay-as-you-go model. Whether or not we have success there, we'll adapt accordingly and make sure that we provide access to our users and take advantage of the models that are there, but we would like to influence a pay-as-you-go model. We think that's the way Omnipod should be reimbursed.

Yes. No, that makes perfect sense. And let's talk a little bit about the market. Bret, you're the you're the CCO. So I assume you've had something to do with the shift to include type 2 more as a market focus. But I think it would be helpful to understand how the transition from the pure type 1-focused company or it's all about your type 1 intensive insulin patients, I mean -- but shift broadly towards insulin delivery, irrespective of type 1 versus type 2. So help me understand, was that a conscious decision? Was it a pleasant surprise you realized after pharmacy became a driver? Or how has that thought process evolved?

Yes. Well, I think everyone in our industry understands the massive opportunity that is type 2. There's also a tremendous amount of unmet needs for those patients as they're not getting the technology that they deserve to manage their disease. And so we, like others, have had our eye on type 2, and we know it starts with unlocking access. And so we weren't surprised that the pharmacy channel unlocked access for type 2. It's something that we knew was there and was available. I think what we have been impressed with is just how appropriate Omnipod is for the majority of type 2 patients today. And so we've talked in the past about the reservoir limitations of having a 200-unit reservoir. What we found out is that as Omnipod reduces the daily dose of insulin for many users, that there's more opportunity than we realize within the type 2 segment. We already had what many type 2 patients value even more than a daily dose of insulin, which was ease of use, greater discretion. So Omnipod is very appealing to type 2 patients. And when we unlocked access with the pharmacy channel, I think what we're starting to realize is what the demand looks like in endocrinology because although we've had some type 2 patients try to get on Omnipod prior to our entry into the pharmacy channel, there were so many restrictions for type 2 patients. They had to pass peptide tests and other pancreatic function tests that many would fail. Payers would put up roadblocks because of this large upfront fee and this perception that type 2 patients are going to be less compliant. And so once we unlocked the access, we started to understand what the demand was. And it's growing because physicians are understanding now that if they write a prescription for Omnipod in the pharmacy channel that a type 2 patient will, in fact, get on product. So we've been really pleasantly surprised. We're going to continue to expand upon that opportunity and market more directly to type 2 patients and look to innovation to even further simplify the product.

And then as type 2 becomes a bigger part of the story, how should we and investors think about the TAM and the size of the market that Pod and Omnipod plays in? Is it type -- is it insulin-intensive patients broadly? Is it the broader type 2 patient population? And then, I guess, secondarily to that is how do you view the competition in the real market you're in? I think the things I've gotten wrong from a valuation perspective, at least, is to think about you guys purely as an insulin pump company, whereas it's more of an insulin delivery company when you think about MDI and the conversions you're seeing. So how do we think about the TAM as type 2 becomes more into the story? And then who do you view as your real competition?

Sure. I can pick up on the TAM. Bret, if you want, I could pass it over to you for the competitive insights. So our TAM, very large unpenetrated market that we feel we're very well positioned in that. That's the thesis. And it's about a $10 million TAM in the markets that we serve today, and that's roughly half in the U.S., half outside the U.S. So if we focus on the U.S., we break down type 1s around $1.7 million. And then for type 2s, it's somewhere between $2.5 million and $3 million. So that gets you close to $5 million in the U.S. and a little more outside the U.S. and the key for us to this market, although it's very large, is unpenetrated. The type 1 market is around 1/3 penetrated today. And type 2, 95% are still using multiple daily injections, single digits, less than 5% type penetration. So we do focus heavily on the MDI user base. That's the one that we're targeting our innovations for and we feel that we've got significant differentiated position, both for type 1s and for type 2s. And as you mentioned earlier, Kyle, we've now launched DASH outside the U.S. And DASH is a first step to our automated insulin delivery system integrated with CGM, and that's what will be coming with the Omnipod 5 in the first half of next year in the U.S. and then after that, OUS. So DASH becomes our first step in innovation towards it, and then we pick up with Omnipod 5 on the other side.