Insulet Corporation (PODD) Earnings Call Transcript & Summary

Good afternoon, and thank you for joining us for the second day of the 2021 Morgan Stanley Healthcare Conference. I'm Cecilia Furlong, medical device analyst and a member of the health care research team here at Morgan Stanley. It's my pleasure to have Insulet with us today, Shacey Petrovic, President and CEO; and Deb Gordon, Vice President, IR. Before we begin, I'll run through our disclaimer. For important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. And with that, Shacey, Deb, thank you for joining us today.

Thanks, Cecilia. Great to be here with you.

Thanks.

And I wanted to start 2021, but kind of looking back in time a little bit, but as you sit here today versus how you thought about your positioning entering 2021, where do you have increased confidence across the business? And really, where have you seen the greatest outperformance versus your initial expectations, notwithstanding evolving COVID dynamics?

Yes. Yes, I love the opening question, Cecilia, because I think there's a lot to be excited about. You think about even this last year, this last year in 2020 marked our fifth consecutive year of 20-plus percent revenue growth. So just tremendous momentum, even in the face of the headwinds associated with the pandemic. And you look even more recently, this last quarter, record-setting new starts globally and in the U.S., even again in the face of the pandemic and in the face of sort of the competitive landscape and not having automated insulin delivery on the market quite yet. So I think there's just tremendous things to be excited about. You look at the momentum in the pharmacy channel. You look at the momentum across both type 1 and type 2 adoption, and you look at international expansion and just the underlying strength of the business, and that's all happening today. And then we think about what's coming with Omnipod 5, with international expansion, with continued growth in type 2. And it just -- to me, it makes me incredibly excited, incredibly confident in the trajectory of the business today and in really being able to maintain that growth trajectory over the long term. So it's pretty exciting. I think if you look at where might I be sort of pleasantly surprised relative to COVID, I think it really does lie in the new patient or new customer start growth. To see that be at record-setting levels while we're still experiencing headwinds associated with the pandemic, I think, is just a remarkable testament to the strength of the business.

And I did want to ask about that 2Q record starts, like you said. And at this point, do you think there's any potential backlog impact enhancing new patient starts? Or is this true, underlying market dynamics playing out driving growth?

Yes. I think we believe that it is underlying market dynamics. It's the growth of the diabetes technology space, increasing adoption across both people living with type 1 and type 2 diabetes and then just the strength of Omnipod's position in the market, how differentiated we are in both of those segments, that really is what's driving increased adoption. And in fact, I would also point to our investment in direct-to-consumer advertising as one of the drivers that's helping to grow awareness and then just really unlock it, particularly the multiple daily injection user population. So I do think it's underlying growth dynamics. And then you look at diabetes as a whole, it's a very large, fast-growing market and one that is really underserved. And so these efforts that we're making to increase awareness, to disrupt the business model, bring more cost-effective access to Omnipod and then just the differentiation of the technology, how simple it is, it's a unique form factor, these are the things that are driving adoption in our market and really driving the record new customer start quarter that we had last quarter and actually now 3 quarters running.

And you talked about direct-to-consumer as well. CGMs, obviously, have been pushing that. But as you think about really your type 2 specifically and the kind of halo effect from CGM, DTC efforts, I'm just curious kind of how you look at that versus your own efforts as you push forward on the DTC front.

Yes. Well, it's terrific to see our CGM partners drive awareness in this marketplace. We've always said that CGM adoption is great for Omnipod. What it does is help people get comfortable wearing a device on their body. That's great for us. It also then gives people access to really empowering data about how they're doing and helps to demonstrate how few people are really in the optimal control for their blood glucose. And then that prompts them to start to look for tools like Omnipod to get into better control. So this is a great trend for us, and we were fortunate to learn a lot from our CGM partners on DTC. This is very much a capability build. And we saw the benefit of DTC among CGM utilization, and certainly, we're seeing the same benefit from our investment in DTC. For us, I would say it's early days, fortunate to learn from our partners, but we're still getting better. Every month, we get better in terms of the efficiency of our spend, the return on our spend, learning about which channels return, which times return the best kind of allocation of our investment across the various DTC vehicles. So it's early days, but the leading indicators clearly show that DTC works, that it's driving increased awareness really among both segments, among people living with both type 1 and type 2 diabetes, and that it's one of the contributing factors for our performance in terms of new customer starts over the last few quarters.

And around new customer starts, too, I wanted to ask U.S. versus OUS dynamics, kind of what you've seen play out. But just looking outside of COVID, what other factors have contributed to a slower return to new patient start volumes OUS? And really, can you speak to the geographic differences relative to virtual training access or other factors that have pressured new patient starts OUS?

Sure. Yes. Well, I'd first say, last quarter, our international performance was, I think, just over the high end of our expectations. So really strong quarter for us relative to our expectations. I think, in the U.S. and in our international markets, the teams are doing a terrific job utilizing all the tools we have in our arsenal to try to mitigate the impact of the pandemic and to continue to grow our customer base in the face of the challenges that the pandemic presents. It's true that our international markets were more heavily impacted. And in fact, it's funny because we always refer to our international markets as 1 market, but in fact, it's 50 separate markets. And you're right that the dynamics are different across each one of them, depending on vaccine rates, depending on the business model, how patients get access to care. All of these things will contribute to how they're impacted by the pandemic. Internationally, even more recently, some more recent color is that we do see the Delta variant impacting our international market. We've seen the resurgence of some of the things that we were seeing earlier in terms of restricted access to clinics, et cetera. And the teams are using virtual training, using other tools to be able to mitigate the impact of that. But when we look at our international markets, some of them are more impacted than our U.S. markets in terms of the impact of the pandemic.

Okay. And just wanted to shift to U.S. business specifically, looking at the pharmacy channel. Talk about 45% of total U.S. volumes going through pharmacy today, but as you think about Omnipod 5, bring them on, over time, where does that trend? What are the barriers to kind of a certain threshold going through the pharmacy channel, ultimately, as you think out 3 to 5 years from now?

Yes. Well, I think it's helpful to look back. Here we are 3 years after launching our pay-as-you-go model in the pharmacy channel, and 45% of our business is now going through the pharmacy. So really tremendous progress in those 3 years. And I think that's a testament to the value of pharmacy for all of the stakeholders. The pharmacy for the payer reduces that risk of outlaying thousands of dollars upfront and hoping that the patient stays on the product. Pharmacy for the patient provides a very predictable low out-of-pocket cost for the user and eliminates those large upfront costs for the user. We know for sure that that's helping to drive adoption. And then, of course, for Insulet, it's a more efficient channel. And for the health care provider, it's an easier channel to use as well, very simple prescription with reduced barriers to adoption. So this is a really strong channel with a lot of benefits for all of the stakeholders, which is why we've been able to establish access there so quickly. And then as we look forward, we do think Omnipod 5 will be another driver to bring more of our volume into that channel. To your point, there are some barriers, right? We have to create awareness in the channel of the value. We are disrupting the business model by eliminating 4-year lock-in periods, eliminating upfront costs. This is better for everybody in the health care system, but we do have education to do there. And we do have to establish access for Omnipod 5 as we move into this channel because it is a new NDC code. But the fact is we're providing Omnipod 5 for price parity to Omnipod DASH in the pharmacy channel. So this means we're going to provide improved outcomes, really innovative, groundbreaking technology essentially for the cost of multiple daily injections. And we believe this will be another driver for people to move into the pharmacy and should help us continue to grow that channel for us, which is a great thing, as we said, for patients; for clinicians; for payers; and ultimately, for Insulet.

Okay. And turning to international. You've expanded into new markets, Australia being a more recent one. But I'm just curious, kind of as you think about starting up in new markets, Australia maybe as kind of the focus point today, but the barriers that you're looking at, how you think about the ramp rates. And then as you look geographically where you don't have an established footprint today, what are the key markets as you think over the next 5-plus years that you'll look to target over time?

Yes. It's a great question, Cecilia, because we really do view international expansion as a long-term growth driver for Insulet. Today, we're just scratching the surface in terms of the opportunity there. So this is something that as we grow into new markets, continue to penetrate, what are, by and large, very low penetrated markets today and bring new innovations to our existing and new markets, this is something that's going to drive growth for Insulet over many years to come. I think Australia is a really good case study because we now have a fairly large footprint and a strong capability in Europe. We have a really good understanding. We have most of our major functions built there, really strong patient insights across our European markets and a lot of capability to leverage as we move into new European markets, and even the Middle East, which is a market that is -- can typically be served out of Europe. Australia is our first footprint into Asia Pacific. And so it is a new step out, we did opt to go direct and make the investment there. With any new market entry, we are, I would say, extremely disciplined in terms of making sure we've got the right go-to-market strategy. We will evaluate the opportunity to partner. We will evaluate what it will take to be successful in serving our patients and our clinicians in a direct mode, and then make the right decision that we think will enable us to optimize the opportunity there. So I think Australia is very exciting for us. It's our direct footprint there, our first step into Asia Pacific, and a pretty exciting market where we know already, we're seeing great demand there. But any international market, because of our business model, takes a while to build up the annuity. So unlike the others, we don't take 4 years of revenue upfront, and so it does take time for any single country or any single new expansion market to contribute materially to revenue. When I think about international expansion, it really is about the long-term growth opportunity and this compounding over time to diversify, strengthen and provide horizons of growth opportunity over the coming years.

What about type 2 also as you look to kind of further establish yourself in these markets and the tremendous type 2 opportunity. But just as you think about trying to develop that side of the market versus what you've done in the U.S., what are the bigger barriers there? And how do you think about the type 2 mix of your OUS business evolving over time?

Yes. You're hitting at a really important point. One of the things that has enabled us to unlock the type 2 opportunity here in the United States, besides the form factor and direct-to-consumer awareness, has been market access. The fact that through the pharmacy, we've been able to eliminate historic barriers that have existed to adoption among insulin-dependent type 2 users through our pay-as-you-go model and eliminating this upfront cost. We need to do the same thing in our international markets to really unlock that opportunity. The other thing we've done in the United States is just share really compelling clinical data in terms of the value of Omnipod in the type 2 user segment. We've demonstrated a -- depending on the study, 20% to 30% reduction in total daily dose of insulin, significant improvements in A1c and time and range for the type 2 user time and range with Omnipod 5. So really strong evidence base that is helping us to establish access and change clinical opinion about the utility of Omnipod in the type 2 user population. We have just really started those efforts internationally. And so when we think about horizons of growth, I think there is great growth to be had as we bring our product to the type 1 population internationally. And then we will follow that with data, evidence and access tied to type 2. And it is a more complex effort, because when we think about our international markets, as I mentioned, it's not one thing. There are different business models, different data requirements, different regulatory requirements, but we are committed to expanding utilization among both segments. The type 2 opportunity internationally in some of our markets is going to take longer. In some, it will be a near-term effort. I think of the Middle East as an example of a market and some select European markets where the type 2 population is a bit more available to us. And then other markets, it will take more evidence and more health care economic arguments to be able to really expand utilization among that segment in international markets.

Okay. And kind of coming back to the U.S. market and specifically type 1, you talked about 33% type 1s today from a pump penetration standpoint. As you think about longer term, you've talked about maybe 2/3 of the U.S. type 1 now looks realistic for penetration. But how does O5, Omnipod 5, specifically factor into your long-term market outlook? And then, as we think about the relative split between tube and patch pumps longer term, kind of maybe walk through the drivers and just how you're thinking about the evolving landscape?

Sure. So there's a lot there. I think maybe I'll start with the overall market. We get very excited about the potential of insulin pump therapy and the total market growing rapidly. We said we think the market can double over the medium term, 5-plus years. And the reason we think that is we look first to the pediatric segment, and you can see that already today, more than half of pediatric users use pump therapy. So that's a great harbinger of what's to come in the market. The second thing I look to are just the natural historic barriers that have existed to pump therapy. So we all know that pump therapy, and as we move towards AID, even more so improves outcomes for people living with insulin-dependent diabetes. So the question is, why has it not been broadly adopted? It's been around since the '80s. And it comes down to cost, it comes down to complexity and it comes down to awareness. And really, there are just incredible investments being made across the market on behalf of CGM partners and ourselves to really reduce or eliminate those barriers. We've already disrupted the cost model to bring really cost-effective pump therapy to people. We are investing in awareness. And of course, as the technologies advance and become more user-friendly, then we see even segments who have historically been pretty resistant to complex technology like the type 2 user start to adopt technologies like Omnipod. So these are the trends that make us very excited about where this market can go. And then you asked specifically about Omnipod 5. We view Omnipod 5 as a game-changing technology. And the reason is that we have worked very hard to make the technology as simple as possible and to bring truly differentiated features that will result, we believe, in extraordinary ease of use. And that, we believe, is one of the key barriers to bringing these technologies to the millions of people who can use them as opposed to hundreds of thousands. So things like full mobile phone control, things like embedding the algorithm in the pod so that you can stay in closed loop and you don't get kicked out, things like customizable glucose targets, those are all designed to really make the system super easy to use so that, really, young people, old people, eventually type 2, everybody truly can benefit from this technology. And so we think those design choices and the time that we've taken to really execute on phone control are the things that can help expand the utilization to even more people across the globe.

And with Omnipod 5 coming out, and you talked about Q4, and I did want to just ask one, if that's still the current time line? But then as you think about type 2 penetration with Omnipod 5 initially, where that trends? And then over time, really, how do you see that percentage evolving with Omnipod 5 specifically as an online commercial product?

Yes. Sure. So first, I'm always excited to talk about Omnipod 5. I think everybody in our company is just incredibly excited to get this technology into the hands of users. We know people are enthusiastically waiting for it. We shared on our earnings call, our Q2 call that we had received feedback from the FDA, no surprises, but they had given us some great feedback on a number of areas, but most specifically, the mobile app. And we opted to make a software update to that app as part of our response to the FDA's questions tied to our submission. We've now completed that work. We've completed the software update. We have resubmitted the answers to the FDA's questions. And all of that puts us exactly where we want to be, right on track, we believe, given current review times. That points us to an end of Q4 clearance, and that would put us right into a limited market release at the end of the year. So pretty exciting. No update to guidance there, but just some additional color that gives us continued confidence in that time line. As it relates to type 2, so we will launch with a type 1 indication. We'll launch actually with the broadest age range launch of any AID system down to age 6. So 6 to 70 is technically the labeling. And as you know, we started our type 2 feasibility study for Omnipod 5, now about half a year ago, maybe a little bit longer. And we had some of that early data presented at ADA that demonstrated incredibly compelling results. So we saw a doubling of time and range for type 2 users from somewhere around 29%, 27% to 57% approximately. Deb, correct me if I'm off here, but I think that's right.

You're right, 27% to 59%, yes.

Yes. Great. So we are confident that this technology will have just tremendous value in the type 2 segment. That said, we have been growing rapidly with Omnipod DASH. And so we do think that the timing is going to work out really, really well for us. Because if you can see what's happening just in the macro dynamics in the market, we see CGM utilization really accelerating in the type 1 population. We're going to have the best AID system on the market to capitalize on that. And now we're starting to see CGM utilization increase among the type 2 users. And so it will take us a little bit of time. We will get through feasibility, which we've wrapped, and then we will move into a pivotal study. And then we will submit that pivotal study result to the FDA for an expansion of our label. And we think, while that plays out, we're going to see increasing utilization of CGM among the type 2 segment. And so we think we're going to be really well positioned to kind of be there, as CGM use accelerates, to be there with a terrific system for type 2 users that's integrated and automated with our CGM partners. So I think timing should be pretty ideal actually in terms of when we get to market with Omnipod 5 for the type 2 user. And in the meantime, we have an outstanding product with Omnipod DASH for the type 2 segment, outstanding business model. And that's clearly evident in the data and the adoption trends, right? Today, 35% to 40% of our new users are living with type 2 insulin-dependent diabetes. And so I think that speaks to just how simple, just how cost effective and how differentiated DASH is for that population.

And on the data side, you've talked about providing a SIM card with the PDM for Omnipod 5, but how are you thinking about leveraging that data going forward? I'm just curious, kind of with that, the expansive number of patients you'll have, just how you're thinking about that today? How that can differentiate you and really just drive improvements in care longer term?

Yes. Well, I think SIM cards and phone control are a part of a strategy to be able to bring really valuable data and insights to all of the stakeholders to, particularly, our consumers but also to their health care providers and to their payers and to Insulet, should the consumers consent. And that data, the data that we can get from real-time data coming off of the system through either a SIM card or phone control, can be incredibly valuable. It significantly streamlines uploading of data to the clinic, for example. Really, no proactive behavior on behalf of the clinician or the patient and just, over the air, automatically updates data to the clinician. You can imagine a parent who can real time, regardless of whether their child is connected to WiFi or not, be able to see how their child is doing with Omnipod 5. And then, of course, that data is also incredibly valuable to us as we think about learning from how the users are using the system to be able to inform next-generation system technologies, over-the-air updates, et cetera. So I think there's any number of value-generating opportunities as a result of that data. There's very few companies out there, just a handful of us, that have devices that are putting off real-time data of such enormity to the company. And certainly, our goal is to take that data and generate value for people living with diabetes, and we see a number of ways to do that.

And with Omnipod 5 tube, and sorry for all the focus here, but obviously, a big focus for you coming forward. But as you think about transitioning out of the limited market release into full launch, do you think about new patients versus existing Omnipod patient conversions? How do you think about those trends shifting of initial launch versus maybe a year-plus down the road?

Yes, Cecilia, I think it's a great question. It kind of points us to 2022 when we think about what's going to happen with the business. I mean I could talk about Omnipod 5 all day long. I'm incredibly excited about it. So ask away. When we think about what the trend is going to look like, we're going to be moving into a limited market release at the end of this year. What will dictate limited market release is primarily the user experience and market access. So we're making tremendous strides on market access. We shared that update on our last call. The teams have done a great job establishing access and continue to establish access as we get closer to launch. But there will be a number of payers who will not establish access until we have FDA clearance. And so we're going to have to work through that trend and get that established. That will be one of the gating factors before we move into full market release. We want to validate the customer experience, make sure that's all operating as we fully expect it to be before we move into full market release. And if you think about it, there are 1,000 different patient journeys. There are going to be people coming to us from multiple daily injections who have never used a pump before, potentially never used a CGM before. We're going to have people who have never used a pump, but have used a CGM and everything in between, pump users -- or tube pump users, Omnipod users, et cetera. The fastest path on to Omnipod 5, because we know you have pharmacy access, because we know you know how to use Omnipod DASH and Dexcom, is going to be a Dexcom DASH user already in the pharmacy. That will be the fastest path onto the technology. We know, because we're offering Omnipod 5 at parity pricing to DASH and we don't lock our users in, that virtually our entire customer base is going to be interested in converting to Omnipod 5. And so we've got a lot of work to do. We're creating a lot of really exciting self-serve modules and tools to be able to move people on to the product. And I would imagine, as we get closer -- as we get a year out, we will have really worked through a lot of elements of those customer experiences, and we're going to be seeing customers coming from all areas on to the product. We also are making an investment in awareness to ensure that everybody in the pharmacy channel understands the benefits of Omnipod 5. And we will continue to build awareness among people living with insulin-dependent diabetes about the value of our technology. So all of that, I think, will drive utilization. I think what will be really interesting and maybe what your question is getting at is, today, 80% of our new users come from multiple daily injections. We know we have a very simple, very exciting product for that segment. And we also know the market research demonstrates nobody selects a pump because it has tubes. When we lose people, it's because we don't have automated insulin delivery and CGM integration. So it's very exciting to think about adding those features and technologies to Omnipod. And we would expect to have probably a more competitive offering when it comes to the pump users today, whereas the vast majority of our users today come from multiple daily injections. That mix, as we get out and people get more familiar with the benefits of Omnipod 5, is likely to shift.

Okay. And last question in the last minute, kind of looking out, vertical integration in diabetes, can you just talk really quickly about flexibility benefits of not being vertically integrated? And again, looking out, how do you see this field evolving down the road?

Yes. I think it's such a great question. It's such an interesting market because there is an incredible investment in innovation and technology innovation across the market, across sensors, across algorithms, across insulin delivery technologies. And I think because the market is innovating so rapidly, it's really beneficial right now to be able to be integrated with all of the technologies, specifically the sensor technologies. And our goal really is to be able to provide sensor choice. We've been very public about our partnerships with Abbott on Libre, Dexcom G6 will be our first generation, extraordinary technology, but we're also already working on G7. And it takes a lot of work and investment to be able to integrate with our sensor partners and their pipelines over the long term. So I think because of the pace of innovation in this market, we are benefiting from being an open system that can integrate with multiple sensors. And I think that will result in us being able to bring our technology to many, many people across the globe. We think about different geographies having different share positions with sensors, and it's important at this point to be able to be integrated with multiple sensors. We also think that the product that we're going to launch with Omnipod 5 and G6 is going to be a game changer and a winning product in the market. But it's a platform for which we will continue to develop on, and we'll bring it to different phone platforms, different sensor platforms, and we'll continue to innovate in different segments like pediatrics and type 2 as well. So I think, when we think about Omnipod 5, we really view it as a platform for long-term growth at the company and could not be more excited about taking our first step, but we see many iterations of the product that include integration with many different technologies to bring value for a long time to come to people living with insulin-dependent diabetes.

Great. I know we're out of time, but I wanted to say, Shacey, Deb, I very much enjoyed this conversation. Thank you for being here. And again, thank you for the time today.

It was a pleasure, Cecilia. Thanks so much for having us.

Thank you.

Thanks, Cecilia.