Insulet Corporation (PODD) Earnings Call Transcript & Summary

Great. Well, good morning, and thanks for joining us. My name is David Lewis, medical device analyst here at Morgan Stanley. It's my pleasure to have with us here members of management from Insulet Corporation. Insulet is a disruptive technology provider in the diabetes pump landscape. I want to say a couple of words about diabetes before we get going here and then we have broad items this morning. In my 20-year career, I don't think I've seen a situation where there is a medical technology where the confluence of factors has really sort of come together. Right now, in the diabetes landscape in just the last 3 or 4 years, we've seen unprecedented expansion of reimbursement for diabetes-based technologies, we've seen changes in access to diabetes technology to where patients in actually can get their devices. It used to be in an endocrine's office, endocrinologists. Now they can get access to devices at the pharmacy, whether it's a CGM sensor or, in the case of Insulet, very disruptive, you can actually get access to the pump device itself because of its consumable-based business model. And then there's been all this technology innovation. This notion of we can sense better, we can see people's glucose, we can transmit that data more reliably, and then we have pumps that are going to interactively work with all this data to create kind of a closed-loop diabetic system. So we are closer now to "the artificial pancreas" than any time in my 20-year career. And like I say, Insulet is at the forefront of all of these integrated factors that I hope we can talk about a little bit today. So joining us this morning from Insulet is their Chief Financial Officer, Wayde McMillan; and their Chief Commercial Officer, Bret Christensen. Pleasure to have both of them. They both provide some very unique perspective on the business.

I guess just before we begin, Wayde or Bret to chime in here, just -- I think it'd be helpful to kind of help understand there are a lot of pump providers out there, but they're 2 providers, and there's a fundamentally different value proposition provided by your form factor. Just help us understand or crystallize that the advantage of that form factor or why your technology is potentially so disruptive.

Yes, David, thanks for having us. I'll start with that one. The most obvious advantage and value proposition of Omnipod, and it has been the case since we launched the product, is the form factor, and it's what our patients and users love. It provides a unique freedom in their lifestyle because our mission is to reduce the burden of people living with diabetes. And the form factor of Omnipod being the only approved patch pump on the market is a significant advantage for us as patients look at their options coming from multiple daily injections and looking for technology. Because Omnipod provides freedom, and it's a 3-day wear disposable pod, it's waterproof. It really is unique and ideal for a patient's lifestyle whether they are exercising, swimming, going about their lives. It provides tremendous discretion for those that want that diabetes as there's no tubes. And then we added to this value proposition pretty dramatically with the launch of DASH a few years ago as we provided the controller on a lockdown smartphone device, which provides greater discretion, greater ease of use and was really a stepping stone to what we're really excited about which will be the launch of our next-generation product, Omnipod 5, where we are finally adding what's probably missing from the value proposition today in CGM integration and an AID system, or automated insulin delivery systems. So with Omnipod 5, the pod will speak to a CGM to their Dexcom sensor and automatically dose insulin, really reducing even further the burden of people living with diabetes.

Bret, the market size, when I grew up in the business, this was always about a type 1 market population and pump-based technology kind of got us to kind of 35%, 40%, kind of hit a wall right away, 35% to 40% penetration of type 1 for years. How should investors think about the market that you're playing in? There's an opportunity for type 1. You've actually put out some data here in the last 4 to 6 quarters, talking about your penetration to the type 2 market. So help us understand type 1 market, type 2 market and should investors be thinking about a company that is aggressively penetrating sort of one versus the other? I mean, how does that market opportunity for Insulet change here over the next coming years?

Yes, David, it's a great place to start here, and it really sits well with your opening comments about diabetes being this unique market opportunity today. And I think the fundamental reason for that is it's on the very beginning of a technological evolution or revolution. You mentioned CGMs, moving people from fingersticks to continuous glucose monitoring and that allows people with diabetes to really understand what their blood glucose levels are. And many, many more people, both type 1 and type 2, are finding out that they're not in good control and maybe doing a damage to other organs in their body. And so it's then a choice, multiple daily injections, historic tube pump technologies or our new novel patch pump design. And so we really want to be a solution for people both for type 1s and type 2s. To your question on the size of the markets, if we start in the U.S., we sized the type 1 market between 1.5 million and 2 million patients and type 2 is approximately double of that, about 2.5 million to 3 million patients for a total of 5 million addressable market in the U.S. and that's, as you said, David, very under-penetrated on the type 1 side, and the way we define it is insulin-intensive, both basal and bolus, is how we frame that addressable market. On the type 1 side, under-penetrated with only about 1/3 of patients using pump technology today, about 2/3 still using multiple daily injections. And then on the type 2 side, given the market paradigm that we're in, type 2s are single-digit penetration, 95% of type 2s who are insulin-intensive requiring patients are still using multiple daily injections. So we see this market as a very large under-penetrated market that we have a great solution, a differentiated solution for. And if we look outside the U.S., we think our addressable market in the countries that we're in today is approximately the same as the U.S., about 5 million patients. Type 1s, again, about 1/3 of that, type 2s about 2/3 of that. And then we're actually very happy to announce that we're now moving into 5 new markets: one, we've announced previously, Belgium, and we're moving into 4 new ones, into Greece, Qatar, Croatia and Kuwait. So we're very happy to start to expand the business even further and build on that TAM. We add another 500,000 to 1 million available customers for us with those 5 new regions. So to your question on the market, David, very large under-penetrated market for us. We think we've got a significant differentiated advantage here for us to try and go serve our mission, as Bret said, and help people with diabetes.

So 2 big markets here in type 1, type 2 intensives. And as I said before, this always was a type 1 market, but over the last 4 to 8 quarters, you've started to talk about a significant penetration. Type 2 became 35% of your new patients and then ironically investors started thinking about this being more of a type 2 company and then your CEO, Shacey Petrovic, came out a couple of quarters ago and said, "we now see this fundamental opportunity in type 1." So as I think about type 1 versus type 2, Wayde, and I think about the coming up of Omnipod 5, where is the bigger opportunity for on Omnipod 5? Is it creating a closed-loop -- sort of first closed-loop system going after those type 1 pumpers who typically use 2 base systems? Or is this really a fully integrated perfect form factor that's going to bring those type 2 intensives into the fray? It's hard for me to figure out where the bigger market is. Where is the bigger opportunity or is it a little bit of both?

Yes. The good news is it's a big opportunity in both sides and for type 1s and type 2s, and we feel we're well positioned there. Maybe I'll talk to the market, and then, Bret, I'll pass it over to you to talk about our positioning in our business model as well as our technology. So today, we -- and historically, 80% of our new customer starts come from multiple daily injections. So we see the biggest opportunity, David, to your question, on the under-penetrated piece of the market, both type 1s and type 2s. By far, the largest part of the market is people who are still using multiple daily injections. And pump technology has been around for several decades, and it's still under-penetrated. So that told us we needed to take a new approach, both on the innovation technology side of things as well as with a business model to try to change that old market paradigm and why the market was stuck at a third penetration for type 1s and very small for type 2s. And so years ago, our innovation approach was to simplify and to really change how we serve people looking for a different technology with a much more simple product, and that's what resulted in the innovative changes we've made to Omnipod. We've launched DASH now in the U.S. for the last 2 years, and we've had great growth with new DASH product in the U.S. And just recently, in the last couple of months, we've launched DASH across all of our existing international countries. So lots going on from our standpoint to address those market opportunities. Bret, maybe I'll pass it over to you.

Yes. I think unlocking type 2 was big deal for us. And we did that in the U.S. through the pharmacy channel and pay-as-you-go. It's something we still got to do outside of the U.S. But as we look to Omnipod 5, I think the offering is going to be really strong, both for type 1 and type 2 patients. We won't have labeling for type 2 on day 1 as we've got to do a feasibility study and gain that on the label. Omnipod 5 will be labeled for type 1, at least initially only, but the addition of CGM and AID is what's going to be really key and probably the most obvious thing there for us that's been missing in the past. Patients have had to choose as they come off of MDI between the form factor that they love and Omnipod. And if they're a CGM user and many more are CGM users as CGMs had tremendous penetration, which we love as it provides probably a pipeline for future Omnipod users. But if you're really attached to your CGM today, you might opt for a tube pump and sacrifice on form factor as you get that CGM and AID integration. So what we love about Omnipod is that we'll check those 2 boxes and we'll see the power of the form factor comes through.

Okay. I'd be sort of remiss not to talk about the impact of COVID here for a second. It's a healthcare company. There's been a kind of -- any healthcare companies has been materially impacted. Though medical device companies very impacted, Wayde, your company has been a little more durable, frankly, to COVID-19. Maybe talk to us a little bit about how COVID-19 has sort of impacted the business, U.S. and ex U.S. How we're feeling about this most recent resurgence and the company's ability to sort of weather these impacts to the supply chain, the broader commercial and supply chain here as we go?

Yes. You bet, David. It has been very difficult. Maybe I'll start operationally, and then we'll talk about the business and commercially. Operationally, our teams, I think, did a really good job. Our essential workers have made the transition with mitigation and safety protocols implemented. And so we got our China facility up and running in a couple of months and our U.S. manufacturing facility was able to learn on things that were done there and kept constant production. So our operations teams have really done a great job transitioning and continuing to produce product and stay ahead of demand throughout what we've felt from the pandemic so far. And then our other teams transitioned to remote work very well. The R&D teams, clinical teams, all the support functions have done a great job, and we really haven't missed a beat. So it's quite surprising and amazing, I think, of how well people have transitioned operationally. Commercially, we benefit from our recurring revenue model. So our annuity revenue model has really helped be very durable throughout the pandemic. If we wind back to 2019, we had significant momentum building in the business. We were setting record new customer starts each quarter, almost quarter-on-quarter throughout the end of 2019 and into the first quarter of 2020. And the way our annuity model works is those new customer starts come in, in a quarter and then they annualize over the next 4 quarters. And so we had a lot of momentum in the business coming into Q2 when the pandemic really hit in the regions that we're in, in the U.S. and in Europe and internationally. And so Q2, we ended up getting about 50% of the new customer starts that we expected. So it really slowed down the front end of our annuity model for new customer starts. And most of those new customer starts, the half that we did get, were virtually trained, almost all of them through virtual training. So our teams had to read the situation, and we had virtual training capability being built for Omnipod 5, so we accelerated some of those programs. And working with our physicians, both in the U.S. and outside, they did a really good job to still bring new customers onto product, half of what we expected, but still half, on a positive sense, still picked up the product during the front end of the pandemic. And so as we then roll forward to Q3, our most recent quarter, we improved on that. We ended up 30% below our expectations or in other words, we achieved 70% of our expected new customer starts. So we saw it start to improve. It improved faster in the U.S. We saw endocrinologists and physicians find ways to move to TeleHealth and to adopt virtual training and allow us to do customer virtual training. Internationally, it's been slower. On the 50%, we were better than that in the U.S. It was worse than that internationally. And on a global basis, we got 50% of our planned new customer starts. And then internationally, as we move into Q4, we're also seeing more lockdowns and more challenges. And in the U.S., we're starting to see some more of the progression of the pandemic, but the teams are doing a great job, both the physicians and our sales teams are doing a great job continuing. So our expectations for Q4 is that we continue to see improvement. We've got a forecast of 15% to 25% of our new customer starts for the year. It's our expectation that the U.S. is at the favorable end of that or actually has a chance at getting back to our original Q4 expectations. Again, we have to see how the pandemic plays out and how impactful it is. Outside the U.S., as I mentioned, slower improvement. And with the more recent lockdowns that we're dealing with and more challenges for our teams getting in to meet with endocrinologists, we're expecting it to be more at the unfavorable end of that or even above the 25% impact. So we'll see how that ends up shaking out for Q4. We like that it's been improving. And even though the pandemic has persisted, we've seen ways both for the physicians and our sales teams to continue to service customers and get them the new therapy that they're trying to adopt. And so we've done a pretty good job there through the end of the year. We're obviously, like everybody, excited to get to the other side of this thing after vaccines are launched, get to the other side of the pandemic. And then for us, it's all about building momentum again. Getting that new customer start pipeline back up to expectations and then get us into Omnipod 5 in the second half of the year.

Yes, it's -- if there's a silver lining, David, to COVID for us, it's that some of these virtual tools that we've been building historically in anticipation of just providing scale to the commercial organization, things like virtual trainings, we didn't start that process with COVID. We actually have had virtual trainings in the works for some time, things like an e-prescription for physicians that can really quickly send a prescription to the pharmacy channel for patients to pick up pods, self-service around virtual training, which we started with DASH, as we know many of our legacy products wanted to switch to the new DASH platform and will happen again with Omnipod 5. All these things we would love to provide a virtual complete end-to-end solution and virtual trainings was a piece of that. There was historically some hesitancy from physicians to allow virtual training as they weren't sure it was going to be as effective. We're uniquely suited for virtual training with our ease of use, our product, our patch pump, which has very few components. It is really easy to train virtually. So if COVID did one thing for us, it really sort of forced all of us to look at these virtual solutions in a different way, more physicians were willing to opt for virtual training for their patients. And hopefully, there's some stickiness there as we think that provides a lot of scale for us in the future.

Okay. Very clear. So it sounds like you're weathering through, still seeing improvement in the recent resurgence. You see more prepared to whether that resurgence than obviously were several months ago. So that's obviously good news. What about, Wayde, just the pay-as-you-go model, right? This is the unique dynamic. There's unique form factor and unique distribution in the U.S. and pay-as-you-go kind of moved to sort of 30% the business here most recently. I guess, the question is, where can that 30% go over time? And when does that unique distribution start paying real dividends when you start thinking about the middle of the income statement and the margin structure of the company, maybe it already has started to?

Yes. I'll pick up with the second half of the question, and I think, Bret, from a commercial standpoint, would be best served to talk about the pay-as-you-go model there. It is a wonderful business model innovation for us. We think that this is one of the major reasons that pump adoption and better therapy for multiple daily injectors wasn't really an option, particularly for type 2s. And so as you said, David, we've seen great pickup in this through the pharmacy. Our DASH product is sold through the pharmacy and the pay-as-you-go model. And for those that aren't as familiar with it, we've changed the model from a large upfront fee and a smaller disposable to going at risk with payers in the U.S. and actually, in certain regions outside the U.S., we've had success with the pay-as-you-go model being adopted, and we're looking to try to continue that internationally and speaking with governments about understanding the risk-share benefits that we offer with the pay-as-you-go. So what we do is we do not charge upfront for the PDM. It is simply an at-risk model. When people start using the pods, they pay on a monthly or quarterly basis as they use the pods. So there's really no upfront risk for payers to pay thousands of dollars for a piece of capital equipment that may or may not get used. And then for us, it turns into a strategic cultural approach. We are all about customer service at Insulet. For us, it is when we first acquire the customer all the way through the lifetime that they're with us, and we're very proud to have some of the best retention in the industry. And so that was one of the reasons we could move to the pay-as-you-go. We were willing to take that bet because it's easier to get on the product, which means it's easier to get off the product. And so we were watching our attrition rates very closely. At the start of the year, we assumed we may see a tick up in attrition because of the pay-as-you-go model. And in Q1, we actually saw our attrition get better. It was favorable. And then in Q2 and even through the pandemic, our attrition rates have been stable. So we're very happy that the pay-as-you-go model is economically strong for us. Obviously, it's unfavorable for us because we give away the PDM, and there's no charge for that upfront, but we do charge for a premium on the pod, which gives us a tailwind, the longer the customer stays with us. And so we really do like the model from an economic standpoint. Bret, do you want to talk about the commercial side?

Yes, I think there's -- we like the model, but I think patients like the model, and I think payers like the model as well. So one thing it will do for us is this elimination of the 4-year lock-in period is a problem, especially as, David, you mentioned there's a lot more innovation taking place in this space now, and we desire to innovate our product in shorter cycles. And with this 4-year lock-in period for patients, anything shorter than 4 years is not that beneficial to patients because they are locked into their current technology and can't migrate to new platforms like Omnipod 5 anyway. And so what we love about it is when we launched this with DASH, patients were able to migrate to DASH right away, there was no upfront fee. And now with Omnipod 5, they'll be able to do the same. And so that will allow us to innovate. And as we innovate, patients will always have access to the latest and greatest Omnipod. It also does provide some scale you asked about, is there some efficiencies being built in. As our patient base gets bigger, there's a lot of cost associated with checking benefits every month for patients when we're servicing them directly. And then when we launch a product like Omnipod 5, you can imagine there's going to be tremendous demand with our existing base, and this pharmacy channel that we've established will help us a great deal with upgrades and just supplying that product to the broad patient base. And then finally, the pay-as-you-go model provides just a predictable cost structure for patients. So they're not paying this large upfront fee, but they're also not seeing these cycles throughout the year where the first 4 or 5 months of the year, they're trying to meet their deductible, and they're paying a lot of money out of pocket, they get a really predictable copay that's very low. And it's just helpful for attrition and for utilization for us as patients can predict exactly what their out of pockets are. So there's a lot to love about pay-as-you-go. We're going to look for more opportunities with Omnipod 5 to implement that in the markets outside the U.S.

And Bret, you -- so pay-as-you-go is a big driver in the U.S., as will Omnipod 5, but you started this conversation and you obviously made this point as well as our healthcare conference back in September about the international expansion. One of the big things of this business when the new management team came over was going direct moving away from Insumed, which creates all kinds of commercial development opportunities ex U.S. So what do people not appreciate about sort of the ex U.S. commercial opportunities? And then, I think I always sort of assumed that there probably was an underappreciated growth opportunity for the ex U.S. business, but I'm not sure all the analysts of the company are fundamentally modeling the international growth rate faster than the U.S. growth rate. I mean, how should we think about that? Is the international business likely to grow on a multiyear basis faster than U.S. or is that maybe not the case just based on the unique opportunities that present to you in the U.S.?

Yes. The U.S. has been strong, and some of that's been around innovation, volumes, the investments we've made as well as this tailwind for pharmacy, but there's a tremendous opportunity outside the U.S. We're really only in about a dozen countries in Europe, Canada, Israel. So that means there's a lot of markets we could get into, but even the markets that we're in today are more under-penetrated than the U.S. is. So we've got to solve for that, but there's an opportunity for growth in the markets we're in and then there's this tremendous opportunity for expansion. And Wayde mentioned these 5 markets that we're now getting into this year ahead of schedule and better than what we expected with COVID. Those are smaller markets that Wayde mentioned and a smaller TAM. They're the ones that as we assess the landscape, we look at where access is good and strong and where we could quickly get into expansion and sort of test some of our capabilities in those smaller markets. There are some really big markets out there that will be really beneficial to us. Because of the business model, it will take some time to build a base in those markets to really add to the top and bottom line, but that is an exciting opportunity expansion that we are going to invest in and expect to see just markets being added over the coming years.

Wayde, when do you see -- I mean, how do you see U.S. growth versus ex U.S. growth over the next 3 to 5 years? Does one definitively grow faster in your mind?

Well, the good news is they're both very strong. And so it's tough to call where we'll see it. As Bret said, we have significant drivers helping the U.S. business. It's going to get Omnipod 5 first with CGM integration. And CGM is doing a great job of paving the way for people with insulin-intensive diabetes and beyond, but certainly in the available markets to us and intensive-treated patients, there's significant opportunity in the U.S. with DASH today, with Omnipod 5 starting next year. So we'll have very strong growth there. And then as Bret said, we're continuing to grow and expand internationally and adding more regions as we just did with these next 5, we'll have more regions to talk about next year when we get to our Q4 earnings and where we're planning to continue to expand. As Bret said, some of them have much larger TAMs than the one we're in today. So the good news is it will probably be a 2-horse race, David. I think both the U.S. and internationally would both be growing very strong.

Okay. And so bringing this all together, kind of down the P&L here, Wayde, I mean we've talked about the revenue story in multiple markets and technology platforms. The other -- the last transformative piece that sort of the new management team bought here was really addressing margin issues. A lot of that was gross margin by improving, obviously, the pay-as-you-go model happened, manufacturing was a big piece of that, going direct ex U.S. was a big piece of that from pricing perspective. How confident are you that you can get to sort of that 70% margin relative to the LRP in '21? And then beyond that, Wayde, you said sort of mid-teens margins as this kind of company. Mid-teens margins for a 70% gross margin company is -- leaves a lot of room for conservatism, even one of your CGM providers that's sort of moving up to 70% is starting to drive more like 20-plus percent operating margin. So number one, confidence in getting back to -- getting to that 70% next year. And then what should investors expect out of this business for the middle of the income statement over the next several years?

Yes. We think we have a very exciting story for investors here. And in the short term, it's going to be a heavy investment thesis. And as you said, David, gross margin is an important part of our thesis, and we're really building in into the DNA of all the projects and programs that we're running to make sure that we are maintaining a high gross margin. And to your question, our confidence is very high that we'll be able to get to our 67% to 70% guidance for next year and then 70% over time. The biggest drivers there over time, we've moved this business from the 40% gross margins into the 60% gross margins and a target to get to 70%. And you highlighted a couple of those, going direct and removing the platform distributor in Europe was a big one. Team did a great job executing on that. The operations manufacturing teams have done an excellent job of continuing to build efficiencies and scale into the manufacturing operations, and we're really in the middle of that. We've just stood up our U.S. manufacturing facility. We've got 2 lines out of our 4 total lines producing salable product today. So we're 2 lines into that in the U.S. Just this past year, we stood up a second third-party manufacturing facility in China to leverage the team and the value chain that we have there. We're very happy with the production that we've got from our existing manufacturing in China. So we now have ability for more redundancy, more balance, both in China and globally. And then we've certainly got room for significant more capacity as we move into Omnipod 5. And then as we work our way down the P&L, David, we see a significant market in front of us, a significant market opportunity in a very differentiated position. So you should expect us to continue to invest heavily in R&D to continue with the innovation advantages that we have today, and we'll also be investing more in selling and marketing. As you said, we will see more efficiencies in the pharmacy as we continue to transition more of our business there. So we think the U.S. will become more efficient over time and some of the color that Bret provided there on what the pharmacy channel provides to us. And then internationally, we'll be shifting more investment there as we continue to build on the infrastructure that we have today, but then as we move into more waves of growth beyond that, we'll have to build the selling and commercial infrastructure to support that. And so we'll start to see some leverage in selling and marketing, but our main leverage in the short term will come from our support functions in G&A, and we do have a target to continue to build profitability over time and to build a very profitable, sustainable business, but our priority number one for the next few years will be continuing to invest to continue our leadership position. And as we scale the business at high gross margins, we think that will be a competitive advantage for us. Because of high gross margins, we'll be able to continue to invest heavily in innovation and drive higher profitability over time.

Thanks, Wayde. Just in the last minute and mostly because I don't want to give way the last word, that's my objective here today. So Bret, I think great markets attract great competitors. So if investors are looking to invest in the diabetes space and the pump side of the equation, they've got 2 pumpers, Medtronic and Tandem, and they also have now insulin-pen companies. Why should investors look at Insulet, not be concerned about 2 pump competition and not be concerned about smart pen competition?

Yes. Well, a couple of things. I think we've shown how we fared against 2 pumps even without CGM integration and without AID. So there's a lot to be confident as we approach Omnipod 5, the value propositions from Omnipod 5 even get stronger. And then I think if you look at other technologies like the pens and things like that, that are sure to enter the market, you really only get outcomes from continuous insulin infusion like pumps and pods. And CGM is going to be a driver of information to patients as they get more information about their BG levels about time and range, they're going to want to improve upon that. And pens will would be a facilitator of see that information. They won't be a facilitator of improving it because you only get that from continuous insulin infusion and from AID systems. So there's a lot to be excited about as patients continue to adopt CGM, want to improve their outcomes and look toward technology like Omnipod to improve it, and we're going to be really well positioned with Omnipod 5 to be the leader there.

Okay. With that, we're 1 minute over. Wayde and Bret, thanks so much for joining us here today. I'm sure follow-up questions, feel free, audience, to shoot me an e-mail. I know some have already shot me some e-mails here post this conversation, but have a great week team, and thanks so much for joining us here, and everyone else, have a great week and holiday season. Thank you.

Yes. Thanks for hosting us, David. Thank you.

Thank you.