Insulet Corporation (PODD) Earnings Call Transcript & Summary

All right. Good morning, everyone. I'm Chris Lin, one of Cowen's health care analysts. It is my pleasure to welcome Insulet to our conference. From the company, we have Shacey Petrovic, who is President and CEO. We also have Wayde McMillan, who is CFO. So thanks for being here.

Great to be here, Chris.

Great. So just to provide a quick road map, over the next 30 minutes, my goal is to cover 3 key topics including: one, the insulin pump market dynamics; two, Omnipod 5; and three, margin expansion targets. So with that, why don't we just jump into it?

Starting with the market growth. So 2020 was a challenging year in many aspects. I think it's clear that the pump market growth is accelerating based on your results and those of your peers over the past few years. As you reflect on 2020, what do you think have been the key drivers to market growth in terms of factors such as CGM adoption, better awareness among both type 1 and type 2 patients and various actions you are taking? And just as importantly, how are you thinking about the sustainability of these trends?

Yes. Thanks, Chris. I think you're highlighting what is really exciting about the market that we serve at Insulet, which is that we're at this technology adoption inflection point. And in some cases, for some segments, like people living with type 2 insulin-dependent diabetes, we're at the very early stages of it. And as is the case with CGM adoption in the type 1 space, we're seeing more rapid, more mature adoption of that. So both of those things are driving our growth. I'll start with the first one you mentioned, which is CGM adoption. This is a very favorable trend for us at Insulet and for Omnipod adoption. We've seen it really help drive Omnipod adoption over the last few years as more people living with type 1 insulin-dependent diabetes put on a CGM. They get access to the information of their blood glucose and how little time essentially they're spending in range. And they get used to wearing something on their body, those 2 things then prompt the user to start to look for other solutions like Omnipod. And it's really interesting, we have been growing rapidly and more and more of our users are using CGM, but yet, we don't have a CGM-integrated product on the market yet. And that's one of the reasons why we're so excited about Omnipod 5 because we see that as an accelerator. I'll just highlight the type 2 space, where really CGM adoption is really nascent, but we expect the same trend to take place among type 2 users with insulin-dependent diabetes. We see that the CGM companies, both Dexcom and Abbott, have their sights set on the type 2 population and that is going to be a very helpful trend for us. You mentioned awareness. Certainly, the CGM companies are driving awareness. We have started to invest in direct-to-consumer advertising and awareness and we know that, that is helping to drive adoption as well. And the third thing, you didn't mention, which I think is a big driver of adoption is just broader access. So the efforts that we've made to bring really affordable, predictable, broad access for people living with both type 1 and type 2 diabetes for Omnipod has certainly been driving adoption for us. In particular, we've got a very differentiated position in the pharmacy. And one that is helping to bring pump adoption to segments like the type 2 user that otherwise would be more restricted and have less access, certainly less affordable access to these technologies.

That's great. And I'm going to dig in on some of those very shortly. But before we do, maybe could we just touch on COVID-19. I mean it sounds like based on the Q4 call, the U.S. has largely recovered, but there are still some lingering issues in Europe. Can you just refresh us on what challenges you're facing today as it relates to COVID-19 and in terms of 2021 guidance, I think it still assume some COVID-19 impact. Is this largely to reflect the compounding issues of lower new patient starts in 2020? And do you still see COVID-19 impacting new patient starts in 2021?

Yes. Great. I think a lot of good things to dig in there. And I'll ask Wayde to take the guidance-related questions, but just in terms of what we're seeing with COVID, 2020 was an interesting year for us because we really landed at the end of the year with much less impact from COVID than we originally anticipated. So we finished the year, about 20% off in total our expected pre-COVID new patient starts. And I think that reflects the team across the globe, just all of the work that they did to invest in virtual training and virtual physician interactions to ensure that we were able to still bring our technology to people out there who could benefit from it. But when we say 20%, that's a global number annually. And we saw kind of improvement throughout the year, and in Q4, landed at about 10% our pre-COVID expectations. The U.S. was a little bit better than that, and international was a little bit worse than that. And so that points to the dynamics that you just described. We're seeing that the pandemic in 2020 impacted our international markets more heavily than it did in the United States, and we're seeing that the impact is a bit more protracted. And so that's reflected in the guidance. And maybe, Wayde, you can give a little bit more color there.

Sounds good. Yes, I can pick up on Shacey's comments. But I'll probably start, Chris, with your point on the annuity model and how new customer starts in 2020 impact 2021. And as Shacey said, we saw an impact both U.S. and internationally, but the impact was less in the U.S. It was always, as Shacey mentioned, to the good side of our global shortfall and new customer starts through Q2, 3 and 4. And as Shacey said, Q4, we were very close on the U.S. to our beginning of year expectations. Then we also saw a great momentum from Q3 into Q4. Globally, we saw 40% sequential increase in new customer starts from Q3 to Q4. And so when we think about the U.S. for our guidance in 2021, we're not back to normal, we are still seeing headwinds. It still fits and starts across the U.S. As we all know, some states are more challenged than others. Our sales reps have had great success with dealing with their endocrinologists and their customers. Customers are still somewhat hesitant to adopt new technology during the pandemic, but we think we're mostly through that in the U.S. Outside the U.S. is a different story. Countries that are larger for us, bigger regions and important are still dealing with lockdowns, shelter in place, curfews, countries like France, Germany, U.K., really all the countries across Europe are in different states of dealing with the pandemic. And so that's why we reflected in our guidance, more of a pandemic headwind compounding in from 2020 as well as continuing and persisting throughout 2021.

All that said, I should just make a point that the guidance is still very strong, right? So even with the impact of the pandemic, we are guiding to significant growth across both regions. And I think we feel like we're very well positioned as we head into this year.

Maybe just to dig a little bit deeper on that. I mean I look back at the history here, but you -- Insulet has always been, I think, prudently conservative in setting guidance. But maybe just help us think about what are some key factors that could lead you to hit or maybe exceed the high end of guidance as it relates to 2021 revenue guidance?

Sure. Maybe I'll start, and Wayde you can add some color there. I think obviously, we've got Omnipod 5 factored in, in a smaller fashion because we expect to be in a limited market release for the rest of the year, and we're counting on FDA clearance and a limited market release starting in the first half. So if we see earlier approval, if we see faster movement through the limited market release that could certainly push us to the high end in the U.S. We always factor in -- we look at the competitive landscape, we look at the market and we make assumptions in terms of attrition and utilization. And so on the low end, we see a more pronounced impact. On the high end, we see less of an impact. So those things could drive us in that direction. Also, pharmacy conversion in the U.S. and then uptake in some of the newer countries that we've entered into. Based on the business model that Wayde described, when we enter into new countries, we do expect that it takes quite a while for it to be a material contributor to revenue. Because of the annuity model, it takes a while to build the customer base. If we see that happen more quickly, that's an example of something that could push us to the high end as well.

So maybe just moving on to Omnipod 5, this is, I think, one of the most exciting product -- new product launches for Insulet, combining your already leading form factor with the benefit of automated insulin delivery. So as you just announced or just stated, Omnipod 5 is on track for a limited market release in the first half of 2021. So maybe just help us think about what are the key parameters you're monitoring for this limited launch? And just looking ahead, what are some prerequisites and time lines for transitioning to a full market launch? And I think it was about 6 months for DASH, is that a good benchmark for us to use, thinking about the Omnipod 5 time lines?

Sure. Yes. And I think DASH is a good proxy because we have to do some of the same things with Omnipod 5 that we had to do with DASH. So you're right. We are on track for what we believe will be a commercial launch in the first half of this year. And what we have guided to is that we expect to be in limited market release for the remain -- most of this year. And that will be driven primarily by how rapidly we expand access. So we made a couple really important decisions regarding the launch of Omnipod 5. The first is that we are going to price the product at parity to Omnipod DASH and that we will be launching through the pharmacy channel. And so what that means is all of the work that we've done with DASH in the pharmacy channel is leverageable for Omnipod 5. And we are hoping to establish broader access with Omnipod 5 more quickly, given the decision to price at parity and given that we can leverage this pharmacy network of wholesalers and establish agreements to more rapidly establish access, but there still is work to do there. And so we still have to amend all of the agreements. We have to introduce Omnipod 5, which will be the first automated insulin delivery system available in the pharmacy. To payers, who might not be familiar with it, I get them educated on it. And of course, we need clearance before they can start to contemplate updating agreements. And so that's the work that will play out from the time that we get FDA clearance through the rest of the year. But we do expect to establish access more broadly. And this is really, really exciting from my perspective because today, what we've accomplished with DASH and what I said earlier is driving adoption among people who otherwise would not have considered pump therapy is we've established really simple, really efficient, really predictable and really affordable access through the pharmacy, where patients can get access to DASH for -- on average of $50 a month co-pay, and that is in line with what they would pay for multiple daily injections. So our decision to price Omnipod 5 at parity in the pharmacy channel means that we are going to bring really extraordinary differentiated, what we think is, game-changing technology to the community at the price of -- on average, what somebody would pay for multiple daily injections. So we're -- we believe this will help us to expand utilization pretty rapidly.

Got it. And maybe a minor point here, but do you think the anticipated launch of Omnipod 5 could be holding back some patients from just adopting Omnipod DASH today? Or is this really not a concern just given your flexible pay-as-you-go business model and the relatively seamless process to upgrade to Omnipod 5?

Yes. Chris, I think it's a good question. We -- I think the best data point we have to go on is the Omnipod DASH launch. And when we launched DASH, now just over 2 years ago, we -- as we were headed into that launch, we wondered if there might be a slowdown in Omnipod adoption in anticipation of that launch. But I think we did a great job educating the market on the business model and the fact that -- in fact, we're not locking people into 4-year contracts. We're not charging upgrade fees. And when you get on Omnipod, as soon as the next technology is covered, you have access to it. And what we saw with DASH was an acceleration of uptake in the legacy Omnipod as we headed into that launch. So we didn't see a slowdown. And I'm hopeful that we'll do the same education and awareness campaign with Omnipod 5 regarding the fact that there's not going to be an upgrade fee, and there's not going to be a lock-in period. And so people should continue to adopt the technology, and we'll get them on Omnipod 5 as soon as they have coverage.

That's great to hear. And maybe could you just give us an update on your manufacturing, sales and marketing infrastructure? Is that ready to fully support the launch of Omnipod 5? Or are you still looking to build-out some capabilities in 2021?

We have been investing ahead. And so as we think about the Omnipod 5 launch, we've been preparing for this. The sales and marketing teams have been preparing for this for a couple of years now. And manufacturing, as we finalize design, et cetera, we started to invest in increased infrastructure. And so you saw that in 2020, where even in the face of a pandemic, we set up a new facility in China, and we implemented our third manufacturing line here in our highly automated facility in the United States. All of that was in anticipation of -- well, one, it's to meet our strategic imperatives to ensure redundancy, high-quality manufacturing and capacity requirements. And we are investing ahead to ensure that we stay ahead of the capacity requirements and the demand that we expect with Omnipod 5. Certainly, from a commercial perspective, every year for the last several years, we've increased the size of our sales force. And in Omnipod 5, we're really looking for ways to also drive improved efficiency and improved customer experience. And the pharmacy is a piece of that, also how we will train and onboard patients for Omnipod 5 is a piece of that. We had a lot of that work in development when the pandemic hit. And so we were able to, in 2020, really convert to virtual training, virtual support because we had a lot of that built already in anticipation of the Omnipod 5 launch. So I think we're in a really strong position to support demand as we establish access, and we fully expect to do that as quickly as possible.

Okay. Also maybe just related to launch here. So I mean, today, about 80% of your new patients are multiple -- previous multiple daily injection users. The Omnipod 5 enables automated insulin delivery. And I think more than level is a competitive field which is pump-based automated systems. I mean do you think there is potentially pent-up demand for competitive conversions just from traditional pump therapies with Omnipod 5? And what is your strategy for targeting more competitive conversions over the next few years?

Yes. I think you're right that what the market research would indicate is that people have been -- people who are interested in automated insulin delivery have to trade-off. Omnipod 5 is a preferred form factor. And when somebody coming from multiple daily injections doesn't choose the pod, which is their preferred form factor, it's because CGM integration and automated insulin delivery are important to them. And so that's the trade-off that people have been making. And with Omnipod 5, that trade-off will no longer be required because they will be able to get both and actually a lot more with phone control and some of our unique technology features in Omnipod 5. So I think we will see, potentially, those optics change. We have -- really, if you think about the opportunity, the biggest opportunity is still multiple daily injections. We estimate that the type 1, so the most advanced in terms of pump adoption is still only 1/3 converted. So still really the opportunity is MDI, and that's why we focus so heavily on the simplicity of our technology and the simplicity of our access models. And so we still fully expect to grow in that segment, but we will become more competitive in -- for tubed pump users as well. Today, we get about 20% of our users from tubed pumps. We might expect that to expand with Omnipod 5. And I think we've got a lot naturally built into the business model and into how we market that will help us to bring -- to be able to enable people living with -- who are relying on a tubed pump to become aware of and interested in Omnipod 5. One example is we're the only pump therapy out there that offers a free trial, we call it, our 30 days of freedom. So any user of a tubed pump can actually try Omnipod for free. And because of our business model, they don't require an upfront cost so they can easily convert to the technology as well. So as we get closer to the Omnipod 5 launch and get into the throes of it and establish access, we'll be able to educate the market more on that benefit for people who might feel like today, they are locked into a 4-year contract and that adopting the latest technology like Omnipod 5 might be cost prohibitive. We'll educate them on the business model and the fact that they can try it and see how it compares to what they're currently using.

Okay. Can you also just refresh us on the status of type 2 in Omnipod 5? I think you still need to initiate pivotal trials there, but can you just talk about what's needed for that to happen?

Sure. Yes. We do believe Omnipod 5 is going to bring great value in terms of burden reduction. And as we see more CGM adoption among the type 2 user, we want to be right there with Omnipod 5 to bring them the best integrated experience. We launched our feasibility studies now about half a year ago, I believe, and so that feasibility study we’ll look at a small group of type 2 users, we’ll evaluate how the algorithm works, how they interface with the system, which could be slightly different than type 1 users. We'll look at all of that information and take those learnings and make adjustments to the system if we feel like we need to or move right into a pivotal study. But a pivotal study is still to come, there will be a larger group of patients that we evaluate on the system in order to increase the label. We haven't given a time line on that yet, but that work is underway. Recruitment is underway for our type 2 feasibility study, and the early results of that feasibility work will be presented this month at ENDO by Dr. Bruce Bode.

Okay. We'll be sure to keep a look out for that. And maybe just expanding beyond type 2. In the past, you've -- I think you have specifically stated that Omnipod 5 is a platform technology that provides great value to multiple patient and new patient segments. So beyond just type 2, what other label expansions can we expect from the Omnipod 5 platform? And how should we think about the timing and the sizes of these markets relative to your existing opportunity? Anyway you wanted just to frame that.

Sure. Yes. I mean I think the first thing I would say and the first thing that will come is an expansion down to age 2. So we were bold, I think, in our initial pivotal work where we studied the population down to age 6. No other AID system did that. And so we will launch into the market with an indication down to age 6. We just wrapped our feasibility study on what we call our preschool cohort, which is ages 2 to 6. And we are wrapping that up to submit to the FDA and expect to have a label expansion down to age 2 before the end of the year. We just talked about our type 2 population segment, and so that's another very important segment to us. The other areas that we're expanding are in other sensors and other phone platforms so that will bring our technology to more people. And then we have an investigator-initiated trial looking at the value of Omnipod 5 in the hospital segment as well. So a lot of really exciting work underway. We do view this as a platform that can bring value to all insulin-dependent users in a variety of spaces and in a variety of ways through phone control with different phone platforms and different -- integration with different sensors. And that will play out over the coming years. We're investing in a number of areas in terms of the product development and the clinical development. So couldn't be more excited to get Omnipod 5 to market this year, and we will start to update on when to expect those additions and what those market segments look like as we make further work on the product develop -- or further progress on the product development and clinical work.

Maybe just to close the Omnipod 5 discussion with a outlook. Question on the outlook here. I mean clearly, there’s just lots of unknown variables associated with the Omnipod 5 revenue trajectory. And just given what we talked about core markets being very underpenetrated, this being a revolutionary new product that unlocks new market opportunities. I mean how should investors think about the growth outlook here? Can Omnipod 5 accelerate the overall revenue growth or patient volumes over the next several years? How do you think about this dynamic?

Yes. We do expect -- as we look out over the horizon, there are a number of growth drivers, so Omnipod 5 and continued innovation. I mentioned on the earnings call that we've doubled our product development teams working on our innovations that will drive our next waves of growth. And so we will continue to invest in innovation, we believe, that will be a growth driver. Omnipod 5 is the start of that, and we do believe it will accelerate adoption. We also look at global expansion as a significant driver of growth. We're really available in a small part of the world today and we believe that, that has the opportunity to grow and grow our TAM accordingly. And then access and some of the innovative strategies that we have on broadening access so that we can really provide affordable, predictable access across the globe for people living with insulin-dependent diabetes, another really important driver of growth. Because if we think about why has pump therapy not been adopted more broadly, it's because of complexity. We solved that with Omnipod and Omnipod 5, but also because of the cost of these technologies. And we think we can address that like we have in the United States with pharmacy. There's opportunity to drive that type of -- the benefits of the model, this idea of pay-as-you-go and disposable model in other parts of the world. So I think there's a lot of exciting opportunity for growth as we look over the future. We always said 2020 was a terrific year, but 2021 and subsequent years are really shaping up to be even more exciting.

That's awesome. Maybe just moving to a few questions on the pharmacy here. So today, the pharmacy channel mix has increased over 35% of your U.S. volume. How do you see that mix evolving over the next few years? I mean can we -- does this accelerate as you launch Omnipod 5 exclusively into this channel? And could this lead to a more meaningful revenue tailwind just given the more favorable pharmacy pricing?

Yes. I think, Chris, you're right. We haven't given a target for where we think penetration can go, except for to say that it will definitely increase. And one of the drivers behind deciding to launch Omnipod 5 only in the pharmacy is to continue to see more people benefit from the pharmacy channel. What we've seen in this channel is a significantly improved customer experience because of the economics, because of the predictable out-of-pocket costs. With the DME channel, you're subject to these large out-of-pocket costs, large co-pays and sort of unpredictable costs, and the pharmacy eliminates all of that. The pharmacy eliminates constraints and access for the type 2 user. And for the payer, the pharmacy removes the risk of funding a large piece of capital equipment upfront and then having to think about compliance. And then for the physician, it's massively improved workflow. It's just an e-prescription instead of a certificate of medical necessity, a prior auth, all of these things. So we think this channel is a significant competitive differentiator. We will continue to deploy strategies to help more people get access to this improved customer experience. And certainly, it's a better channel for us because it's more efficient. And as you said, because we give the way -- the PDM, we do have a premium on the pod price.

We only have about 5 minutes left, so I want to make sure I touch on some other key growth drivers here. So maybe starting with international. So I think in the past, you've targeted international growth to sustain high teens to low 20s growth rates. You were in this range even with COVID-19 headwinds last year. Just given how big the international market opportunity is, I mean, is this still the right goalpost as we move beyond COVID-19?

Yes, I think so. We -- it takes a while. So first of all, you -- the first thing that you said in terms of kind of guidance just points to the business model. We're going to have some headwinds in 2021 because of the pandemic's impact on new patient starts in 2020. And so that compounding impact presents a headwind internationally in 2021. But the other thing to note is, as we move into new markets, it does take time for those businesses to reach scale such that they're really moving the needle in terms of growth rate and contribution to revenue. And that's just, again, the result of the business model. It takes time to build mass in these markets. So it is a great, exciting growth driver over the long term, but it does take time for that to move the needle. I don't know, Wayde, if you have any other thoughts on that as it relates to guidance?

I think you covered it well, Shacey. I think the high teens, low 20s range that you mentioned, Chris, is how we think about the business over a long term. We think we have a very large runway. International markets are less penetrated than the U.S. market is and so we think we have potential to continue to grow there for a long time. So as Shacey said, we're continuing to invest today in those international expansion strategies. We're thinking about waves of growth over the next 5 years and then beyond that, just given that we're only in 20 countries today. We've got significant opportunity to expand internationally, as you mentioned.

Great. So earlier in our conversation, we talked about how CGM sort of acted as a beachhead for insulin pumps. CGM adoption is clearly rapidly increasing in international markets, do you think a similar dynamic could happen internationally as well where CGM adoption leads to pump adoption?

I do. Yes. And we actually see that even today. There's great overlap between, for example, in some markets, Libre users and Omnipod users and a very similar dynamic there. So as these -- as both Dexcom and Abbott further penetrate international markets, we would expect that to be a very favorable trend for Omnipod.

Okay. Maybe just on Abbott here. So can you maybe comment on how much priority you're placing on the Abbott collaboration? One of your pump peers recently noted that they could integrate with Libre in 2022. I mean is this the time line we should be thinking about on Omnipod 5 -- Omnipod and Libre integration as well?

Well, we have had work underway in partnership with Abbott for the better part of a year now just working on integrating these technologies. It's a high priority. We know it's going to be a great partnership. We are not going to put a time line out there yet. We want to get Omnipod 5 to market, which is coming in the first half of this year before we start to update on the many innovations to follow. But it's certainly an exciting partnership that I think is going to bring really exciting technologies to people living with insulin-dependent diabetes.

Understood, but I had to try.

Of course.

Wayde, last question or we only have about 1 minute left, so maybe I'll throw the last few questions at you. But just on gross margin, so you guided 2021 gross margin to 67% to 70%. Now that's very consistent with your prior longer-term targets. Maybe could you just help us think about what's -- what are the key assumptions at the high and low end of this range?

Sure, Chris. And just recognizing we're short on time, I'll cover it briefly. Revenue acceleration is our #1 goal. Margin expansion is also a goal of ours. And as you highlighted, gross margin is a big part of that story. We have significant levers in the business to grow gross margin. Right now, we've made an investment in our U.S. manufacturing. We also have, in the U.S., the premium on the pod moving from DME into the pharmacy and starting new customers in the pharmacy because we give the PDM for no charge in the pharmacy. And so that mix over time helps us, and that's what gives us the confidence to move our gross margin up into the 67% to 70%, and over time, getting to 70%. And so we feel that's a big strategic advantage for us. It will allow us to continue investing heavily in R&D as well as stepping up our operating margins over time.

All right. I think we are just about out of time. We covered a lot here, but thanks so much for being here this morning, Shacey and Wayde.

Thanks, Chris. It was a pleasure.

Thanks, Chris.

Take care, everyone.

Bye-bye.