Insulet Corporation (PODD) Earnings Call Transcript & Summary

All right. Good afternoon. I think we're all here now. So why don't we get started? My name is Jeff Johnson. I'm the senior medical technology analyst at Baird. And our next presentation this afternoon is from Insulet, a leader in the $3 billion global insulin pump market. With us today from Insulet, we're happy to have Chief Commercial Officer Bret Christensen; and VP of Investor Relations, Deb Gordon. Bret, I think we'll just go into Q&A -- straight into Q&A, unless you have any fantastic overview you want to provide.

No. Jeff, thanks for having us. It's great to be here. I'm excited to talk about the business.

Good. Good. Well, let's just jump right in. I want to talk -- I know you guys have been in a couple of conferences here in the last week or so. And so I'm going to focus a little bit on the short term just to begin with, so forgive me on that. But then we'll talk bigger picture, more interesting kind of strategy things and that later. But from a short-term perspective, it sounds like maybe there's a little talk out there from a lot of different companies, including yourselves, about maybe a little bit of pressure from COVID here just in the last couple of months. So just kind of level set us on what you're seeing maybe in the last couple of months from a U.S. perspective and from an international perspective when it comes to just COVID restrictions and how that may or may not be impacting kind of your ability to get Omnipod scripts out there.

Sure, Jeff. Yes. There's a lot of tailwinds mixed with a few headwinds like COVID that have all sort of contributed to what we're happy with, which was Q2, a record quarter for new patient starts on Omnipod. Like that was the third quarter in a row that we hit a record for new starts. So there's a lot going into driving that, namely the pharmacy channel; our form factor, which we view as the simplest and easiest to use in the marketplace; the overall growth in the market. We're doing a lot around awareness, direct-to-consumer marketing. And then, of course, the industry as a whole is driving a tremendous amount of growth and awareness, including the CGM companies, which we view as really positive to our business. So a lot of things going into this what's turned out to be record new starts for us. That said, to your question, there is a -- there are some headwinds, namely COVID. We haven't gotten out of COVID. We're still feeling the effects of it, although we're much better doing business in this new environment with virtual trainings, virtual meetings. Our sales force is very effective. We have relied a lot, of course, on direct-to-consumer marketing. And then the Delta variant. We don't typically comment mid-quarter, intra-quarter about what we're seeing, but we have spoken in the last few weeks about the Delta variant sort of popping up. And as you know, Jeff, that does have a bearing on new starts in, in particular, ex -- internationally, where many people start on insulin pumps in the hospital setting. There are select markets where that does become a bit of a headwind.

Okay. And just to kind of build on what you said there. It sounds like you're saying it's mainly outside the U.S. in some of those markets. And again, we know in Germany, France, some of those markets, pumps are prescribed more in a hospital setting, things like that. So in the U.S., it sounds like -- and I don't want to push you too much on intra-quarter. I know you guys don't like to do that. But in the U.S., it sounds like you're not seeing anything outside of kind of what you expected.

Well, we are seeing it in the U.S.

Okay.

We do -- we also have more growth drivers in the U.S. I know we'll talk about type 2.

Yes.

The type 2 business is 35% to 40% of our new starts. So we have that going for us. We have the direct-to-consumer efforts in the U.S. So we have -- I guess we have a number of tailwinds that are offsetting what we're seeing. But we do feel it in the U.S., but it's nothing like what we felt last year at the beginning of the pandemic.

Okay. And Deb, maybe help me remember. I don't get access completely to the presentations you did last week at a couple of conferences. But I think I caught some verbiage there that the pressures weren't so great to knock you outside of your guidance range but kind of set you within that guidance range. Was it something like that? I'm not trying to put words in your mouth. I think there was something along those lines that was said.

Yes. I'm actually glad you asked that. So I appreciate the opportunity to clarify. There's a little bit of -- I don't know if the word is confusion, but it's Wayde. He did say it at a conference. And what he was saying is -- he specifically actually said that he wasn't providing or updating guidance, and we weren't going to talk about where we're falling within a range. But the words that were used is, we factored into our range the fact that Delta variant could have an impact. So if you think about it, Jeff, high and low ends, we're factoring in some tail of COVID, right? It's a lagging, multi-quarter impact. We're factoring in some lingering impact of the pandemic. More so at the low end, we're factoring in Delta variant. But what Wayde was saying is within the range, we did consider it with all the things that could put us high, low.

Okay. That's helpful. And then, Bret, you talked about the 3 quarters in a row of record new patient starts. And in fact, if I remember correctly, I think the way Shacey or Wayde or somebody said it last quarter was by quite a bit a record new patient start. I think they put that qualifier on there just to add a little emphasis there. But when I think about your recurring revenue stream model, I got to think, 3 straight quarters of record new patient starts, at least when we look just at 3Q, is probably the bigger contributor than a few new starts that don't drop a whole lot into 3Q anyway when they're a brand-new start in that quarter. It's almost that cumulative impact is more beneficial to your model than a certain impact in 1 quarter.

That's right, Jeff. And you'll remember this from last year when other companies were struggling at the height of the pandemic. It -- in Q2 and Q3 of last year, we were reporting strong earnings, although we did comment on the headwinds associated with new starts. So while we were seeing very low new starts, our earnings and our growth rates were strong. That's because it's -- were always more of a result of what's going on in the last 4 quarters versus what's going on in the current quarter. I mean we like to talk about that. It's one of the reasons why we do highlight new starts, because whenever we've got 4 consecutive quarters of really strong new start growth, you're going to see that reflected in earnings. And so we are 3 quarters in a row now of record new starts. It's really important in an annuity model because you've got to show that in order to reflect it in any current quarter. We're always a result of the last 4 quarters versus what's ever going on in that market.

Yes. Exactly. And you also brought up t2, Bret, and I want to go there for a second. 35% to 40% of your new patient starts in the U.S. in recent quarters have been type 2. How high can that go? And I guess it -- part of that is going to be governed by how fast t1 also grows. But do we think t2 at least keeps up with t1 growth even when O5 comes out here in the next few quarters?

Yes. I mean we're really excited about what's going on with type 2. We've got a number of drivers here. Deb, you're good at talking about the type 2 opportunity. Do you want to start with that one?

Oh, sure. And I always get so excited about it because it's driving strong growth, as you said, Jeff. And what's amazing is we have such a huge runway over the coming years. And our success penetrating the market is because our products are well suited for individuals with type 2. And one of the many reasons why we're so excited about Omnipod 5 is that it builds on the value proposition today. One of the questions that you asked, Jeff, is the percentage. And it's an interesting one because we're strongly positioned to grow Omnipod in the type 2 market. But given the success that we've been having growing type 1 and, as you and Bret just mentioned, 3 record quarters in the U.S., it's actually challenging to predict where the percentages of our customer base will trend between the 2. I'll also note that it actually could be skewed once we have Omnipod 5 in the market until we secure a type 2 indication. So we're -- as you know, work is underway. We expect to secure an indication. So it could be skewed a little bit because of that as more type 1s get onto product more quickly for Omnipod 5. But look, either way, we expect to continue to further penetrate the type 2 market, and we're certainly uniquely positioned to do that with our technology platform as well as the business model.

Yes. And that was going to be my question, Deb. If you had to kind of qualify or quantify even, what's the real driver of t2 for you guys? Is it the pay-as-you-go model? Is it the form factor? Or is it just the easy answer? I'm not going to let you do the easy answer if it's both. So which is the bigger contributor to driving that t2 penetration?

Well, I was going to say it was both, Jeff. But since I can't say that...

Yes.

I will say it starts with access, right? Well, if access isn't there, it doesn't really matter what your product offering really is. We have a really strong product offering, though. We know that we're probably the best suited for type 2 patients as they value ease of use, they value discretion, all those types of things we lead in. But what we really did when we launched DASH and moved to the pharmacy channel is we just unlocked access for type 2 patients. And that starts to build confidence with physicians to write prescriptions for Omnipod. We started to get feedback from those users. That was really the start of it. When we removed that upfront fee in the pharmacy channel for payers and took away the risk of utilization as we owned that risk, that unlocked the opportunity for type 2. And so our access in the pharmacy channel mirrors type 1 for type 2s. And we now were able to talk about all of those great things that the product delivers for type 2 users. And it's driven this 35% to 40% of all of our new starts is type 2. So really, it's all those things, but it does start with access.

Yes. No, that makes sense. So if we go back to t1 for a second. I think in the U.S., whether we're at 33%, 34%, 35% penetration for pump use just from an overall market standpoint, again the easy answer, I think, that we've all just been repeating and using as a circular reference is we all just say, oh, yes, it'll get to 50% probably over the next few years. And I think that makes sense. But I also think it's interesting. You look at some survey data, for example, that just came out from Seagrove in the last couple of weeks, and now their respondent base is probably a little biased, but he was seeing some of the shops saying they think 75%, 80% of their patient base might be on pumps over the next few years, especially because of the functionality that comes with AIDs. So is 50% the right number? Do you -- could you imagine a scenario where over the next 5-plus years, pump penetration in the U.S. is dramatically above that? Or are there always going to be some patients who just don't want to be hooked up to a pump?

Yes. You're right. It's somewhere around 1/3 penetrated in type 1. And for a long time, we were saying 50% is what we thought it could go to. But more recently, we've said we think it can double. And then that's -- so that's putting the difference of somewhere between what you said, 50%, and maybe what Seagrove was saying. I won't comment on the Seagrove data, but what I really like about that data is that's data coming from physicians.

Yes.

Physicians do believe that insulin pumps deliver better outcomes for patients. And so then you ask the question, well, why is the market not more penetrated if everybody believes that insulin pumps are better for patients? And it really stems from 3 factors that we talk a lot about. One is cost. We talked a little bit about that already in the pharmacy channel; removing that upfront fee; getting rid of the 4-year lock-in period; allowing for patients to pay a copay in the pharmacy, which, for us, the vast majority will pay less than $50, which means the average is well below that. Many pay 0. So we're working on costs. The complexity or perceived complexity of these products has always been a barrier to penetration. We're working on that. We delivered a large step of simplicity with Omnipod DASH. We're going to take it to the next level with Omnipod 5. And then the final piece is really awareness. And we're starting to solve for that as well when we launched a direct-to-consumer campaign at the end of last year or in September to really start to drive awareness amongst users because surprisingly, type 1 and type 2 patients are not aware of their options. And so what I love about that Seagrove data is once we remove some of these barriers, you'll start to see more and more physicians write prescriptions for products like Omnipod. That excites me because, again, everybody knows that the outcomes are better. We just have to solve for those 3 things, and we're doing that.

Yes. And I had a question later in my list here on the DTC stuff, and I'll just -- since you brought it up now a couple of times. I think that spend has been somewhere around $20 million or $30 million that you've committed to on an annualized basis or something. And whether that's the right number or not, you can correct me if I'm way off. But my question, I guess, is more how big of a competitive advantage is that for you? I look at the Net Promoter Scores for Medtronic. I don't think they want to be out there probably advertising and doing direct-to-consumer pump marketing. Your other competitor in Tandem, probably too small, maybe doesn't have the balance sheet or the flexibility to do that. Is that a key differentiating factor right now? And can that be a sustainable competitive advantage for you going forward?

It is a differentiator. And I think it's a differentiator because of our form factor, because of the product. We looked at the opportunity for direct-to-consumer spend just over a year ago. We started in September. We made the decision to do it. But what we really recognized was that Omnipod is really ideally suited for direct-to-consumer. It shows well. It's simple. It's easy to use. It is becoming more and more of a consumer-like product. And so we want to move into that medium to drive awareness. As I said, Jeff, awareness is very low. It shouldn't be that low, especially with type 1 users. We think of people with type 1 diabetes as being very aware of their options, being very diligent in understanding how to manage their disease and yet they're -- many of them are unaware of their options. And I think that stems from all those things I talked about in physicians being hesitant to recommend pumps in general. So we wanted to solve for this awareness. It's been fantastic for us. We know it's driving web traffic. We know it's creating leads, and we know that's turning into new starts and is a big driver in why we've been able to report 3 consecutive quarters of record new starts. So it's likely something we'll continue to do. It's something others could do. But again, I think our product is really well suited for DTC and just shows very well. I think we're following the lead of the CGM companies there. We saw that the success that Dexcom and Abbott were having with direct-to-consumer marketing. We believe we're in that same category, where we've got a product that shows just as well and there's a lot of awareness to be created. So we're going to continue to do it.

Yes. And are you guys segmenting the market? Or where do you -- when you do the DTC, is it -- I've seen a few of the commercials, which tells me you're kind of hitting the old people. But just how are you segmenting your kind of user base as you go out there and advertise?

Yes, a little bit. You can do that with the way the product shows, the -- to your point, the age of the actors, sort of the messaging that you focus in on, whether it's reimbursed for Medicare, those types of things. So we do a little bit of segmenting. But remember, DTC is broad advertising. And we did much, much more segmenting with our digital spend and still do that where you can really zero in on a specific demographic based off of what you know in social media and digital. But what I love about the DTC and the TV platform is that it is broad. And so you're reaching all sorts of type 1, type 2 patients, many that don't reside with an endocrinologist, some are in primary care. It's really sort of educating us on what's out there. And it's going to form the strategy for type 2 even more because we are seeing a lot of type 2 leads, many that are in primary care. And it's broad for a reason, but we do segment it based off of the message and sort of that look and feel of the TV commercials.

All right. That's helpful. And then as I think about the international markets, we started out the conversation maybe a little bit of incremental pressure there from COVID and what have you. When I look at penetration rates, if we take a longer-term view on the international markets, they've been stuck somewhere around 10% or so. A lot of cost-effectiveness studies have been mixed at best maybe on -- and which is important in some of these nationalized health care systems if you don't get complete buy-in from the government on pushing pump access. Do AIDs -- do something like Omnipod 5, Control-IQ, those kind of things, do they have a chance to really kind of swing those cost-effectiveness studies and show better outcomes and then maybe you get a little more access and support from the governments?

It's a great question. We're pleased with the performance of our international markets. We did see a lot of COVID headwinds last year, and the team has done a really good job rebounding. We're back to really solid year-over-year growth for new starts. We've had a strong focus on international now for about 3 years, and some of that has been around international expansion. We launched in 5 markets at the end of last year. We launched in Turkey at the beginning of this year and maybe a few months ago in Australia. So that's 7 markets in a calendar year. And then just everything that's going on with direct to consumer. We're also doing some DTC in the U.K., and we're looking at doing that in Germany as well. So there's a lot of really strong growth factors. Reimbursement, to your question, Jeff, in these markets is strong. And one of the reasons why we're in the markets that we're in is we believe the access is there or something that we can improve upon. And I think that those payers and governments recognize the value of a product like Omnipod. Some of them look more to short-term outcomes, things like hospitalizations that are really improved upon when somebody goes to an insulin pump. But what's great about AID, and one of the reasons we're excited about Omnipod 5, is the impact that it makes in time and range. And this is, as you know, becoming more and more the metric, the clinical outcome that we're looking for in studies. There's a lot of building evidence that shows that time and range is a predictor of long-term outcomes, things like blindness, amputations, organ failure. And those are the long-term benefits that we need to continue to show, and I think that evidence will build with AID systems as clearly time and range is higher with them and will be higher with Omnipod 5. So I'm optimistic. Actually, access is strong and reimbursement is good today. And I'm optimistic that we can make even more of a difference by showing those outcomes.

Okay. And just remind me -- and Shacey has been a little not wanting to commit to certain time lines, so I'm not asking you to here. But just how to think about the time line to Omnipod 5 in the international markets? What are the next couple of hurdles we have to -- do you need international data? Just what is the -- what are the hurdles that we -- or the guideposts that we should be watching for?

Yes. We haven't been specific on that only because we're so focused on Omnipod 5 in the U.S. and just getting that product to market. But what we have said is the work is underway to build that product for the international markets. There's a lot to do there. You've got to do individual languages for each of the markets. No market is the same. You -- so there's a lot of work to do. The work is going on today. But I will say and highlight that we've done this before with DASH. So we launched DASH in every one of our international markets at the end of last year. So we're very clear on the pathway to get that product to market. We haven't discussed the time lines, but we will. Once we get Omnipod 5 to market in the U.S., then we'll start to speak more specifically about when we expect Omnipod in some of those international markets.

Okay. Well, maybe a good segue to Omnipod 5 then in the U.S. But let me ask one last one on international markets. You did mention that you're entering Australia. I think it -- Australia could be an interesting market only because you've got another patch pump company that's also entering Australia right now. It will be one of the few times we'll see kind of a head-to-head competition from that company with yours. Thoughts there? Is that a market where you guys should stack up well relative to other tubed pump companies? Plus, this other patch pump company, is that other company even really on your radar screen?

Yes. I mean I know the company you're talking about. We do hear about it. I haven't heard anything actually in Australia. I know the Australian team has seen nothing in the way of that product entering the market. But I'm sure it will at some point. We see patch pump competition all the time in our international market. It does give us a great view into what's coming. And I like that these products are launching in our international markets because it gives us a quick view of how we stack up. Many of these companies have gone out of business. Many of them will struggle. I think they'll continue to come to market, though, because it's an attractive, underpenetrated, underserved marketplace. And the form factor of a patch pump is the right form factor. So it reinforces for me that we've got the right form factor. Some of the struggles won't be necessarily in the form factor. It will be in how the product actually works, the simplicity of the product, and then everything we talked about, Jeff, in the past of these moats that we've built over the last 20 years out of necessity, frankly, through learnings and making mistakes. And it's very difficult to manufacture tens of millions of a disposable product like Omnipod at high quality and good margin. And it's taken us 20 years to do it. It's taken us $1 billion in spend to get there. And others will have to go through that same process, and they'll have to do it with a competitor like Omnipod on the market. So I'm sure we'll see more and more patch pump competition. We look forward to it, and we're always building these competitive moats to prepare.

Yes. Fair enough. So Omnipod 5, obviously the launch and time lines have been pushed a couple of times because of FDA issues. Just any update there, I mean, as far as -- I know you've submitted now all questions from the FDA. That was an encouraging update last week. But we also know with Delta variant in that, FDA is still probably very much focused on COVID-related issues. So it sounds like from last week, you guys are still comfortable with that approval time line before year-end. But just kind of your most up-to-date thoughts there.

Yes. You're right about all that. So we did submit our response to the RFAI, the request for additional information, from the FDA. We talked about the long pull of all of those things being really the feature that we had to build, which was related to the app on the phone and how that interacts with our application on insulin delivery. So that's all done. It's all submitted to the FDA. We wanted to get that message out there. I think we're confident in the time lines of later this year, probably late Q4, of getting approval based off of all the conversations we've had with the FDA as part of the breakthrough device program. It's -- we are in the final stages here. And it's exciting because -- for me, I understand all the complexity that went into phone control, for instance. We are pioneers in phone control. And there's thousands of use cases of how a phone app will interact with the -- our application for Omnipod. And the easiest thing to do would have been to have a locked-down device and not go forward with phone control because that's where all these use cases reside. There was one use case that the FDA gave us guidance, and we made that change, submitted that. So I think we're really confident in the time line we've given.

Yes. And how much of a competitive advantage, I mean, having an entire pump control on the phone? Some of your competitors are going for mobile bolusing. But I'm still trying to understand, how much of just the code, the capabilities, everything is in mobile bolusing versus there's a lot of other technological hurdles to get to full pump control using an app on a phone?

Yes. I think it's substantial. There's -- if you think about everything our phones are doing, Jeff, when you and I are having this conversation, we're getting text messages, we might be getting phone calls, apps are updating, and none of that can interfere with insulin delivery. And so there's -- again, there's thousands of use cases associated with full phone control. It's not as simple as sending a command to a pump that says deliver a bolus specs. That's a much simpler build and a much simpler application and not, in my opinion, even close to full phone control. Full phone control is a choice that we made. We made some really important choices in the design of Omnipod 5. One was putting the algorithm on the pod. One was putting a SIM card in the PDMs. And of course, phone control, all those really complicated the build, extended the time line, but it's one of the reasons why we think it's a leapfrog technology. It took us maybe a little longer to get to market with some of these things. But in my opinion, it's absolutely essential to providing a best-in-class product.

Yes. And is that leapfrog of technology and kind of that competitive gap then that maybe you guys will create there -- is that relative to other patch pump companies? Is that relative to all pump companies? That's what I'm trying to understand. Because I can understand where it's hard to put the algo on a pump when you're going to throw that away every 3 days. So versus other patch pump companies, I get it. It makes a ton of sense. That's going to be hard for other patch pump companies to figure out. But is it a similar-sized competitive advantage versus some of your tubed pump companies? Or is it mainly when you talk about those advantages relative to patch pumps?

I think it's even greater. So, I mean, we've been in the business of controlling insulin delivery wirelessly for 20 years. So we did that through our app. We're doing it through Bluetooth now with DASH. And full phone control is the next frontier. I think we're way ahead of the game here on that. And we're the only ones that can effectively eliminate a component of the system, which we hear constantly from people with diabetes, is look, I'm carrying around too many things, I want to eliminate something. Now they don't want to carry around 2 phones. DASH was great because it's on a locked down smartphone. But effectively, we're asking people to carry around 2 smartphones. And so with full phone control, you can eliminate a component of the device. When you put the algorithm on the pod, that means now you don't even need your smartphone. You can go swimming in the ocean, and the pod and the CGM are talking and automatically adjusting your insulin. So these are things that 2 pump companies will not be able to do. I mean you can only accomplish this with a tubeless form factor and a patch pump. And we think we're way ahead there. Some of the patch pump companies, Jeff, that we've referenced here are starting where we start. They're going to have really simple offerings. They're not going to be AID full phone control, algorithm on the pod, SIM card in the PDM. All these types of things, we think, are keeping us way ahead, I mean, of patch pumps for sure, but I don't think 2 pumps are even in the conversation with some of these offerings.

Okay. That's helpful. And then last couple of questions here. We've got about 2 minutes or so, so I'll keep them short. But last quarter, it sounded like you guys had maybe secured coverage for Omnipod 5 through about 30%, 35% of covered lives in the U.S. Is that where it probably sticks for now until you get approval? And it felt like, again, Deb, maybe last week, you were hedging a little bit that some of those payers are going to actually need to see approval before they move forward. So when you do launch, do you feel like you'll launch with some momentum behind you? Or is it something where we got to think of '22 as being kind of a steady but not huge launch year for O5?

Do you want me to take that one? Bret, I'm happy to...

Yes. Why don't you take that one?

Yes, I'm happy to take it. Jeff, as you noted, we've successfully contracted with many national payers. And we now have more coverage for Omnipod 5 than we had for Omnipod DASH shortly after its launch. And the comments that we made, they weren't meant to hedge. I'm pretty sure we've said it before but maybe not as strongly. So I'm glad that it resonated. We didn't expect to actually secure this much coverage. Some payers, they won't contract for coverage until a product is clear. That's just their own system and rules that they have. And so as we talked about, we're in the final stages of hopefully receiving clearance, as we expect by the end of the year. And we've had great success securing coverage, but we just wanted to let people know, look, we've done really, really well so far. We still have work to do. I would say a key takeaway is that while we expect Omnipod 5 clearance closer to the end of the year, we haven't been standing still. And our point with that, we've continued to drive our commercial coverage strategy forward to best position ourselves for a very successful Omnipod 5 launch. And one of the things we've been saying is we continue to strengthen our position every day and secure coverage, and then we'll be able to do that a lot more broadly once we have clearance.

Yes. Fair enough. Well, with that, I think our time is up, so thank you very much, both of you, for taking the time today. It's always appreciated. It's good to see you both. And as a reminder, the next presentations are set to begin at 2:35 Eastern Time and include Myovant Sciences, Dentsply, NeuroPace and V-I-R, or Vir, I don't know, Biotechnology. So all right. Thanks, guys. Good to see you.

Thanks, Jeff.

Take care.

Thanks, Jeff.