Insulet Corporation (PODD) Earnings Call Transcript & Summary

Welcome to the Wells Fargo Healthcare Conference. Before we get started, if you are a member of the press or media, please disconnect at this time. This is a restricted line. Any unauthorized party in this meeting or any unauthorized use of the information communicated in this meeting is subject to prosecution to the fullest extent of the law. Any unauthorized person, including the media that is on the line at this time, please disconnect. Please note, today's call is being recorded.

Good afternoon. I'm Larry Biegelsen, the medical device analyst at Wells Fargo. And it's my pleasure to host this session with the management team from Insulet. With us, we have Wayde McMillan, Executive Vice President and Chief Financial Officer and Treasurer; and Deb Gordon, Vice President of Investor Relations. Wayde and Deb, thanks so much for joining us this year.

Yes. Thanks for having us, Larry.

So in terms of the format, it's going to be a fireside chat. If anyone has a question they want me to ask on their behalf, please e-mail it to me. And I think we're going to go with the polling question here. It's been working pretty well.

So with that, let's jump in. You're one of the few companies that we're not starting with the COVID question. We'll start with Omnipod 5. And Wayde, you announced a slight delay in Omnipod 5 for the U.S. approval on the Q2 call. I think where are you in the process? I think you talked about submitting a new app feature. Have you submitted it and you're still confident in the time line you laid out on the Q2 call?

Yes, you're right, Larry. And what a great place to start for us, Omnipod 5. We do think this will be a game changer for people with diabetes, and we're bursting at the seams here at Insulet to get Omnipod 5 in the marketplace. We do have an update. We're happy to report that we've submitted our reply to the FDA's RFAI, or request for additional information. And based upon review times, we continue to expect clearance late in the fourth quarter, which is the guidance that you just reiterated that we gave on our Q2 call. So we're entering the final stages of the process, and we're very appreciative of the FDA's collaboration to this point. And as you know, Larry, Omnipod 5 packs a lot of innovation, differentiated innovation for us, and we can't be more excited to get to the end of the review process here, get the product in the market. And yes, so that's the update for us. We're excited to be progressing along this pathway to clearance.

Okay. Great. It looks like our tech may have jumped the gun on the polling question. I'm trying to think -- why don't we talk about -- what do you think Omnipod 5 will do, Wayde, to kind of your business, your new customer starts? How do you think about the impact Omnipod 5 could have? The U.S. growth this year, you guided to 22% to 25% for U.S. Omnipod 5 -- for Omnipod growth in the U.S. What do you think Omnipod 5 can do to the business?

Yes. So I think I got the gist of the polling question there while it was up, Larry. First of all, it doesn't surprise me that you go to the data. I think you do a fantastic job of data, and we often see reports, data in the diabetes space. So what I caught there was just some comparators to the competitive device that's been in the market for 3 years. I think it's probably going to take us some time to ramp up to that type of performance. As I mentioned to the previous question, we couldn't be more excited to get Omnipod 5 in the marketplace, but it's probably just a good opportunity to remind people of where we're at. And we will be in limited market release for a period of time. Assuming we get clearance at the end of Q4, we'll be in limited market release for a period of time. That's the best practice that we deploy. And then we will continue to grow that into a full market release. As part of that, we have access ramping, a reminder that we'll be only launching Omnipod 5 in the pharmacy channel, which means we have to establish access. And we've been doing a great job to this point, but we won't have access fully ramped up when we launch the product. So that will take a period of time throughout 2022. And we will be the first AID system in the pharmacy. And so we've got some work to do there. We will also be spending a lot of time converting our existing customers in the early days of the ramp-up. We have incredible pent-up excitement within our customer base to move to Omnipod 5. So we'll be spending quite a few cycles moving our existing customers on to Omnipod 5. And then just generally, awareness for Omnipod 5, we're going to have to work on that. The data that you were showing there on the previous polling question, competitive products have been in the market now for several years. And so they've built awareness. It's going to take us a period of time to do that. Having said that, I like the optimism in the results. If I caught it correctly, they were voting in favor of Omnipod 5 there. And obviously, we think the same that, over time, that we will have the best AID system in the market. And I just -- I also want just to remind people, we made a lot of choices in this product. There's a reason why we're coming to market after a couple of the other AID systems. From a technology standpoint, it took us longer to put an algorithm on the pod. We're going to full smartphone control. And there's more we can talk about there, Larry, if you want to get into any of those, in particular. But for us, the theme has been it's not really about the next 12 months, to your question on next year's sales growth. For us, it's about the next decade. And we took the time to build what we think is a differentiable platform here that we can continue to innovate on for some time.

And just to close the loop on your update. You've responded to FDA questions, and you feel confident that that's going to be the -- that that's it at this point. I'm just trying to go back to what the update was. What did you respond to? And why do you think that will be it?

Sure. So the normal course of business is to put the submission in. The FDA does their comprehensive review and responds with a list of additional information that they require. And so we went through that holistically. And as I said, we very recently just submitted that to the FDA. And so now we'll be engaging in continued collaboration with the FDA and making sure that we answer all of their information requests. And so we're on the normal course. It just has taken the cycles longer than typical in this COVID environment. And so we feel that now that we've submitted our responses, we'll continue to work with the FDA. And assuming that we answered all their questions and that we satisfy their needs for clearance, we will get that clearance. And looking at the time line and that we've got our comprehensive answers into them, we're hopeful that we will still be on our guide here for approval by the end of Q4.

Okay. And on the polling question, they jumped the gun a little bit. So we might come back to that, Wayde. So I know you're trying to gauge what the responses were, but I think we've jumped the gun. So just before we go to the polling question, there were a lot of questions on the Q2 call about given the short delay here, what that means for the 2022 U.S. Omnipod business. And it sounds like in this year, you're guiding to 22% to 25%, I think, year-over-year growth for Omnipod in the U.S. It sounds like you're comfortable that you could do at least that as well next year despite the delay. Is that fair?

Well, we're not going to give numbers for 2022 yet, Larry. So I can't comment specifically versus our guidance this year. And we give our guidance on our Q1 call. That's our historic tradition, we'll continue to do that this year. But what I can say just qualitatively is that we do have a lot of momentum in the business. As you know, our type 2 strategy is working very well. The pharmacy channel in the U.S. is performing very well. DASH is doing very well globally, both in the U.S. and internationally, but we're still without an AID system, and Omnipod 5 will fill that demand for us next year. But as I mentioned upfront, I just want to make sure we keep this in check and don't get too far in front of it because it will be a limited market release moving into a full market release. We've got to ramp access. We've got to take care of our existing customers. We've got to drive awareness for the new product. So it won't be as fast to ramp as I think us and a lot of people would hope. We've got a good amount of work to do to get there. So we just want to keep expectations for 2022 in check, and we'll provide more -- much more color on that when we provide our guidance in the Q1 call.

All right. Well, maybe go to the polling question, we'll ask it now. It basically has to do with the Tandem new starts versus your new starts. Tandem, we estimate it's going to have about 70,000 new starts in the U.S. in '21 versus about 45,000 for Insulet. That's a split of, call it, 60-40 in favor of Tandem. And the question is, what do you see Omnipod 5 -- where do you see that split in 2022? And so I don't know if the audience is done answering that question or not. Is the tech on from OpenExchange? Is it -- are these the results? Okay. So narrow it -- okay. So Wayde, any response to that, just [ as they're narrowing it ]?

Yes, as I mentioned before, I like the optimism here. And I think we would agree. I can't comment on the numbers specifically, Larry. I don't know if these are patients from the competitors that are renewals or new patients and how they calculate that based on attrition and people coming back to the product or how they're actually getting to those numbers, and we don't provide new customers by quarter. But having said that, I do think what it says and what we've seen in the market over the past few years is that we've been competing very well with our DASH system and that the AID systems in the market have also been performing very well. And we know that when people want CGM integration, CGM has been just doing incredibly well and driving awareness for people an understanding of their glucose levels. So if people choose CGM integration, we didn't have an option for them. And so there were 2 other AID systems in the market in the U.S. There were options for them. And so I think it -- the strength of the performance of all of the players in this market and all the people bringing innovative solutions for insulin delivery just speaks to the large underpenetrated opportunity we have here. This market is in dire need of technological innovation. I think the AID systems in the market have done a good job of integrating with CGM and bringing more users from MDI into traditional pump. But I got to tell you, our differentiated technology, we think we will leapfrog the bunch. We will have a very strong AID system, many differentiable features. As I mentioned quickly before, having the algorithm on the pod and going to full smartphone control will remove a component from the system. So all a user has to do is wear our patch pump and change it every 2 to 3 days and then use their smartphone. And out of the gate, it will be an Android phone, and we're working on iOS to bring that to market as well.

That's helpful. And you say about 45%, I think, of patients are going through the pharmacy today. How do you see that changing over time?

Yes. That's a great question, Larry, because the pharmacy channel is such an important part of our strategy in the U.S. The pharmacy is better, not only for us, but certainly better for our customers, for payers, for physicians. There's just a lot of benefits to the pharmacy. We have a differentiable advantage there because we're selling a disposable product. And so I do think the pharmacy channel will continue to grow over time. We are launching Omnipod 5 only in the pharmacy channel. And so yes, to your question, I think we will see the pharmacy channel continue to grow. And our differentiable advantages there will continue to shine, I think, as more and more customers, physicians and payers understand what value we bring through the pharmacy channel.

And Medicare will -- every payer type will allow pharmacy reimbursement? Or is there some require -- is there a ceiling because some require DME?

Yes. So we've been working hard at that for the last few years since we launched DASH. And we often talk about DASH as a step towards Omnipod 5. DASH allowed us or really forced us to build the capabilities in the pharmacy channel before Omnipod 5. And so we've been doing a great job of that. And as we've been preparing for Omnipod 5, one of the things that we haven't stopped, even though we have delayed the launch and the clearance a couple of quarters here, we have not stopped on the building access side. So the capabilities that we built around DASH, those teams have been working in Omnipod 5. And to your question, we've had DASH in the pharmacy now for over 2 years, and we have 80% coverage in the U.S. And so that means that Medicare, many, many state Medicaid plans, many commercial payers, all the large commercial payers. The teams are just working on those remaining payers and plans to continue to build access on top of that 80% that we already have. And so that's for DASH. The team has been working on Omnipod 5 as well. There are some restrictions to access. Some payers require FDA clearance before they'll engage in a discussion to provide access. Some are allowing us to add them contractually but they won't put the product on formulary until we get the FDA clearance. And clearly, we can't market or sell the product until it's FDA cleared. And so we're working all those different stages within building access. Where I would close on this, Larry, is just to make sure everybody understands that this will be the first AID system in the pharmacy. So we have to do a lot of education and a lot of work with the payers to make sure that they understand what value AID brings. And then, of course, the big decision that we made around what the cost of Omnipod 5 would be in the pharmacy was a big decision for our team. And we were very happy to land on the conclusion that we will price it at parity with DASH, which means we've got 80% coverage in the U.S. for DASH, and we're going to be bringing a significantly more innovative and value-producing product at the same price for payers. And so I think we're creating a strong value proposition. The other side of the economic equation is that when we look at our customers that are in the pharmacy channel today, the majority of them, almost all, pay less than a $50 copay per month. And that is in line with what they would pay for multiple daily injections. So we really like the economic story and proposition that we have and bringing the technology like we have with Omnipod 5 within that economic story, I think we're going to have a really strong value proposition for both customers and for payers. Deb, anything else that I missed there, I just want to make sure we cover off on any of the other pharmacy pieces, if you want to jump in?

No, in fact, that was really comprehensive. I think one of the exciting things, Larry, that you had mentioned before is where we think pharmacy can go. It just provides everybody so much benefit, certainly physicians. It's easier for them to prescribe, and it helps us as well. We get efficiency out of it. It's allowing us to reinvest more in our business because, in time, we get the efficiency to do OpEx because it's a more efficient channel for us to serve and it's allowing us to reinvest in the business to help fuel the top line. But no, Wayde, I think the thing that you nailed is if you think about Omnipod DASH, and Larry, you said this, it's primarily almost all through the pharmacy. And then Omnipod 5 will be by all through the pharmacy. So we see our pharmacy volume growing over time, especially given the success of DASH and what we know will be a successful Omnipod 5 launch.

That's super helpful. And Wayde, usually, we see medical devices, often we see them launched overseas before the U.S. How far behind is Omnipod 5 outside the U.S.?

It's coming. We have teams working on it. We haven't provided dates yet on any of the platform extensions beyond the current Omnipod 5, and we're just holding that. Obviously, we want to get the current Omnipod 5 in the marketplace. And then once we have that, we will have a better understanding of what needs to be done to bring the product internationally. I would say we are very focused on it, Larry. We see international expansion as one of our major value creators over time. We see waves of growth for 5, 10-plus years as we continue to expand beyond the 20 countries that we're in today. And just a reminder that we have a very complex platform here with all the technology we get packed in the pod and full smartphone control. And so it is -- takes a significant investment to get the product ready for all the different international markets. As you know, it has language changes, unit of metric changes. And we're working on all that. We just don't have a date for you at this point, Larry.

Okay. That's fair. You guys -- just transitioning to the pump market. You guys have talked about the insulin pump market for type 1 patients doubling in the coming years. Tandem said the penetration rate was about 35% at the end of 2020. It seems like it's increasing gradually. When do you guys think the pump penetration could double by? And why is the ramp, I guess, going to inflect?

Yes. We agree. We think it's about 1/3 penetrated in the U.S. The type 1 market is about 1/3 penetrated, and we do think that it can double. And the reason we believe that is just the amount of incredible advancements in technology and changes in the business model and affordability that we're bringing to market with DASH and eventually with Omnipod 5. And so lot of catalysts to see that happen. As far as the time line goes, it's not over the next couple of years. I mean, it is a lot of people that have to move to grow the penetration double what it is today. So we think it's probably 5-plus years, Larry. It's going to be really interesting to see. I think it is -- the way to think about it is the technological advancements that are happening here are what are changing the game. So where people using multiple daily injections in the past were hesitant because of cost or because of complexity, whether it was a tubed pump or just the complexity of the tubed pump controller, and so just for all those different reasons, the market has been unpenetrated for type 1s. And I'll just remind people that the type 2 market for insulin-intensive, that's both basal and bolus, is larger than the type 1 market and penetration is still single digits. And so Larry, I don't know if you wanted to touch more on the pharmacy channel, but we think that type 2 with the combination of access for customers through the pharmacy channel, opening up that TAM is an even larger opportunity. So it's hard to imagine that we have an even more significant opportunity than doubling the type 1 market in the U.S., but the type 2 market is also a very substantial opportunity. So the combination of those 2, we believe, gives us a runway for growth for a significant number of years here. And it will be us and the other AID players. It's up to us to continue to bring innovation to keep pulling people from multiple daily injections and give them better solutions for treating their diabetes. And that's what we think will double the market here over the next, call it, midterm, somewhere in that 5-plus year range.

That's helpful. Just to follow up then on the type 2. The last couple of quarters, it's been about 35% to 40% of new patients, I believe. How do you see that changing over time? Is that kind of -- has it reached kind of a stabilization, if you will?

I think just if you think about the markets first, the market opportunity is so much larger on the type 2 side, and it's so much less penetrated that we would think that, that portion would continue to grow faster over time. And we've got such a differentiated position with type 2s and their access through the pharmacy that I think we would continue to see that grow. And as you highlight, Larry, it's been growing pretty steadily over the last few years, in particular, since we moved into the pharmacy channel and we launched DASH. One thing to keep in mind that's on the other side of the ledger is that when we launch Omnipod 5, our clinical data and our labeling supports type 1 only, does not support type 2 yet. And so depending on how fast type 1 Omnipod 5 ramps, we could see a period of that leveling out or even type 1 growing faster than type 2. What we like is we've got strong momentum in the business for several reasons. And so it makes that hard to estimate, which one is actually going to grow faster, but we like that we've got several growth drivers within the business there.

And one just quick thing to add just, Wayde, when I think about that opportunity in type 2, I hate for an opportunity to go by where we don't give a shout-out to our clinical team and all of the advancements that we've made with type 2. So just real quick reminder, Larry, that we told The Street last quarter -- or last month on our quarterly call that we recently completed our -- the first phase of our type 2 feasibility study. And then earlier this year, data was presented at a major diabetes conference that showed time in range improvements that more than doubled within the first 8 weeks. It went from 27% to 59%. And then we also have a large group, about 3,600 patients, of data that we recently published in a peer-reviewed journal. And it showed statistically significant reductions in A1c, but it also showed an incredible 32% reduction in total daily dose of insulin. So really good things happening clinically. And as we mentioned, we're building our economic case and clinical case in order to expand our Omnipod 5 label for type 2 so we can market it to that population.

When are you going to know if you need a pivotal trial or are the 25-patient feasibility trials enough for a type 2 label for Omnipod 5?

Yes. We're -- go ahead, Deb.

No, it's okay, Wayde. I was just going to say what we have said is that feasibility study was the first step in that we didn't give a time line, Larry, but we expect to have a pivotal trial. And we just -- we haven't said how long that, that would take, but it is on our plan. And Wayde, if you have anything else that you wanted to add?

That's it, Deb. You got it. Thank you.

But it's a little bit of a complicated story with Omnipod 5 and type 2 because it's technically going to be reimbursed even though it's not -- you can't promote it because the payers don't distinguish in the pharmacy between type 1 and type 2. So is that the right way to think about it?

Yes, you've got it, Larry, exactly right. Reimbursement will be there. There is no distinguish between type 1 or type 2 through the pharmacy channel. But you're correct, we will be not -- we won't be marketing it as a type 2 product until, as Deb said, we get through the clinical trials that are required to submit the data to the FDA to get it approved and get it on label. But as Deb said, we've already gone through the feasibility. The results look great, and we have it on our clinical pathway and investment plan to make that happen.

Okay. A couple more questions here. Wayde, financial questions. Any reaction to kind of where consensus is for next year, puts and takes you want to call out, things that The Street's not factoring in. I mean it's a required question for the September conference season. So I know it's a tough question to answer, but if there's anything that's not consistent with your -- any of the outlook that you provided, that would be great.

Yes. So as I mentioned earlier, we're not commenting on 2022 guidance yet, but I appreciate the question, Larry, and I certainly understand why people are trying to get an understanding of what's ahead in 2022. And that's why we're trying to provide as much color as we can before we get to the quantitative guidance in our Q1 call next year. So I think what I would just say is our investment thesis, our long-term investment thesis is holding and intact. And in summary, we see a large underpenetrated market, both type 1 and type 2, and a large international opportunity. And so we're going to be investing heavily to take advantage of that. And we think that we can continue to grow the top line very strong for a very long period of time here. And while we do that, we've got a lot of initiatives working to expand our gross margins. And we think we've got industry-leading gross margins today. We're going to continue to build on that. We think gross margins give us a competitive advantage in that we can invest heavily in R&D, in clinical and IT innovation, and we can also invest heavily in the commercial infrastructure, both in the U.S. as we expand into type 2 and internationally as we get into more regions. And so you'll see us continue to invest heavily commercially. And we'll also be investing in the support infrastructure to grow the business and grow at scale -- at the scale we're growing today and expanding globally. And then we'll also be generating some leverage. And so what we've communicated there is we're looking to expand operating margins about 1% a year, which is a pretty compelling financial profile. When you look at how fast we're growing the top line, expanding gross margins and then also committing to expand operating margins, I like the story, and we are going to continue to strengthen our financial profile over time.

Okay. A couple of minutes left here, a bunch of questions, e-mails. And I didn't start with a COVID question like other companies, but maybe I'll end with one. You guys had very strong patient adds in the second quarter, new patient starts. What have you seen? Anything qualitatively you can talk about? Obviously, we're in an unusual time here with the Delta variant. People are obviously concerned about July and August trends. Anything qualitatively, Wayde, you can share?

Yes. Certainly can. And I'll just start by saying we're not updating our guidance that we provided last Q2. So the color I'm about to give is not new guidance, doesn't change our guidance from Q2. What I would say, when we gave the guidance, we contemplated, amongst other things, the potential for the pandemic to impact the marketplace and customers' ability to either access or adopt new insulin delivery products like ours. And so we contemplated that within our guidance range. And I think the reason for your question, Larry, is we are all seeing Delta variant and the pandemic impacts grow here, specifically the last few months. So the color we can provide is, we are seeing it in the U.S. and even more so internationally. And the way it shows up in our business is customers are less likely to adopt new technology. They're less likely to go and meet their endocrinologists. On the other side, we are seeing endocrinologists' offices and clinics closing up again or restricting access or reducing the number of customers coming in. So it's becoming harder for our sales teams. We're nowhere near where we were in Q2 last year, but we have certainly seen a step back in challenges to get meetings with new customers and with clinicians to help people adopt new technology. And so I do think we're seeing that, Larry. What I would say is we've learned a lot over the last 4 quarters. Q2 last year was our hardest hit quarter from the pandemic. We continue to grow our business pretty strong actually throughout the pandemic, given all the momentum we have and other drivers. And so for us, it's going to be a lot of the same. Our teams are doing great with virtual training, virtual meetings and trying to keep our technology moving into the hands of people that need it. But at the same time, the headwinds are getting stronger, no question.

And just, Wayde, one follow-up on that. You said you contemplated upfront in your guidance. Is it -- basically, the direct question is, is it worse than you contemplated? Or how is it relative to what you contemplated, can you say?

So I would just say that we -- obviously, we have a lot of factors in our guidance. As you know, when you set guidance, many puts and takes. I would say we are not at the worst end of it. And so the advantage for us is, we're also performing really well. We haven't talked about the direct-to-consumer marketing that we have going on in the U.S., and we've just started piling it internationally. We have a very unique product offering versus the traditional tube pumps, so we can use direct-to-consumer marketing. It's working really well. So we've got that on top of the other things we've talked about today. DASH is doing very well globally, the type 2 move in the U.S. and the move to the pharmacy channel. And so because we've got that momentum in the business, the pandemic doesn't show up for us as much. But to be clear, we are seeing some headwinds, and we're probably not going to perform as strongly as we would, obviously, if we weren't dealing with stronger pandemic headwinds today. So I can't give guidance. I can't talk about where we're going to land in the range. But I can just say that we're within the range of what we thought about from a pandemic standpoint and how it could impact our guidance range.

Perfect. Really appreciate it. Thanks so much for being here, Wayde and Deb, and hope the rest of the day goes well.

Yes. Great to see you, Larry. Thanks for everything. Take care.

Thanks, Larry.