Insulet Corporation (PODD) Earnings Call Transcript & Summary

All right. Good morning and good afternoon, everyone, depending on where you are. Thanks for joining us on the final day of the Nasdaq Investor Conference. My name is Calvin Chu, member of the medical device equity research team at Morgan Stanley. It's my pleasure today to have the Insulet management team with us, Shacey Petrovic, President and CEO; and Wayde McMillan, EVP and CFO. Before we begin, I'll just 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. With that, Shacey and Wayde, thank you so much for joining us today.

Thanks, Calvin. It's great to be with you today to share a little bit about Insulet's story. Insulet was founded in 2000 with the mission to improve the lives of people with diabetes. And we do that through our flagship product, which is Omnipod. And Omnipod is an innovative, disposable, wearable patch pump that delivers 3 days of nonstop insulin. I think most people know diabetes is a growing global epidemic, and there is significant unmet need across the globe. Omnipod is uniquely positioned and that it is very innovative and differentiated technology and patient prefer relative to other delivery mechanisms, like multiple daily injections with a needle or a more conventional tubed insulin pump. So this combination of huge underserved market, highly differentiated technology and strong execution has been driving our outstanding track record of growth. Insulet has delivered 5 consecutive years of 20-plus percent revenue growth, and we are on track for another great year in 2021. So as we look forward, there remains significant runway for growth in both the type 1 and type 2 segments, supported by our unique form factor, our continued investment in innovation and our disruptive and cost-effective pharmacy channel access that we've established in the United States. Our current product platform, Omnipod DASH, continues to drive very strong customer adoption and helped to drive a record new customer start quarter in the third quarter. And we are set to build on this success through the introduction of Omnipod 5, which is our first automated insulin delivery system. We could not be more excited about Omnipod 5. And here, we do have an important update. At our third quarter earnings call, we had reiterated our expectation that Omnipod 5 FDA clearance would come late in this fourth quarter. And we've been in regular contact with the agency and continue to progress towards FDA clearance of Omnipod 5, but they have let us know that they will not be able to complete the review before the end of the year. It's a pretty challenging environment right now and cycles are just taking longer. And of course, the Omnipod 5 submission is a novel, large and complex regulatory submission. So based on our current conversations with the FDA, we're confident we will receive clearance during the first quarter of 2022. And we are eminently confident in our submission. We've now had hundreds of patients on Omnipod 5 for more than 18 months. And that equates to more than 150,000 user days of data, which just continue to support the safety and efficacy of the system. Also I would say, this delay does not diminish our enthusiasm for what we know is going to be very exciting impact of Omnipod 5 on the marketplace. This is game-changing technology that will bring improved outcomes, improved quality of life and pioneering innovation to people living with diabetes. And it will be a significant and long-term growth driver for Insulet. So we remain very excited about what is to come with Omnipod 5. So thanks, Calvin, for the opportunity to make some opening remarks.

Yes. That's great. So there's a lot of good color there that we can unpack. Shacey and Wayde, I want to start off with kind of the overall market, the market disruptive nature of the technology and perhaps the TAM outlook. I'll start with a broad question. Just where are some of the most underappreciated competitive barriers with scaling up a patch pump business of this size kind of to the level that you have today just from a competitive standpoint?

Yes. I think it's a great question, Calvin. You just have to look back over the last 20 years with Insulet that really highlight what it takes to be able to be successful in this marketplace. The technology itself is innovative. We continue to build strong IP and competitive moats around how differentiated and how novel the technology is. There really is nothing else like it available in the marketplace. But the innovation is just one piece of the puzzle when you look at building this market. There is significant scale that needs to be built to be able to serve hundreds of thousands and eventually millions of patients in this space. We are a provider to the consumer, which means that we deliver the technology directly to the consumer. We help to train and support the consumer as they get launched on the technology. And all of that effort takes quite a bit of investment. And then I would point to just manufacturing scale and know-how. If you think about just the volumes with which we deliver technology to the market, it is a remarkable investment. We will manufacture tens of millions of pods in any given year. That equates to billions of components in the supply chain. And over the last several years, we have made an effort to create redundancy both in the supply chain and in our manufacturing capacity and capabilities. This has been really important as we think about scaling and supporting the scale of the market and the market opportunity. But also it's been really important as we think about launching new technologies to the market and contending with some of the challenges that the pandemic brought in these last 18 months to the marketplace. So all of that investment and capability building that we've been doing, which has been billions of dollars of investment and years of capability building, I think, set us up to deliver during what was a really challenging year. And it's why in 2020 when the market was so challenged by the pandemic, our business still was able to grow 20% and deliver some record quarters in terms of new customer starts. So that sets us up, I think, to continue to unlock what is an enormous available market and a growing one as we look out over the coming years.

Great. I do want to touch also on just TAM and the market penetration expectations. I think pump penetration currently sits just at about 1/3 of U.S. type 1. And then you've recently had an expectation over time to move that number up to 2/3. I think that was kind of up from the 50% expectation previously. So over the past several years as you've opened up pharmacy channel access and introduced pay-as-you-go model, how has your definition of Omnipod's U.S. TAM shifted?

Yes. Yes. It's a great question. I think 2 trends are happening in the marketplace that make us confident in kind of the trajectory of the pump market, particularly in the United States but globally as well. The first is what's been happening with CGM adoption. And this trend of more and more people adopting continuous glucose monitoring is really positive for Omnipod and for pump adoption. Because as people get comfortable wearing a device, as they get access to real-time data, they get very clear indication that they're spending less time than they would like in target glucose range. And that then causes them to look out for other technologies that can help them get into better range. And Omnipod is clearly one of those technologies. The other thing it does is get a user very comfortable wearing something on their body. Omnipod is a wearable just like a Dexcom or a Libre as a wearable. And so that's a helpful trend for us as well. So as we see more and more adoption of CGM, following that has been more and more adoption of pump therapy, in particular Omnipod. The other thing that has happened is we have been able to unlock and establish very broad, affordable access. And this is both for the type 1 segment and the type 2 segment. And that has helped us then to think more broadly about our potential application of Omnipod. I think previously pump therapy was really relegated to the type 1 user. And that was primarily because it was viewed as very complex, very expensive therapy that required a user to be locked into 4 years of therapy because of industry business models and conventions. So what we've been able to accomplish over the last 2 years or so is broad, affordable access in the pharmacy channel, what we refer to as pay as you go. We have eliminated the upfront large cost associated with tubed pumps. We have been able to take that risk away from the payer, who previously was paying upfront for 4 years of therapy for a user and then hoping that the user remained compliant. And as we took that large upfront away, the lock-in period away and said, hey, you payer or you patient and user can simply pay for the technology as you use it, it removed a lot of risk and a lot of hurdles in the industry for more adoption. It also enabled us to establish broad access through the pharmacy channel and for the type 2 user, who just does not have broad access to this type of therapy for traditional tubed pump in the DME channel. So all of that has enabled us to really think bigger about who's a great potential user for this technology and has enabled us to collect a lot of data on the type 2 user and demonstrate that Omnipod is a terrific therapy for both the type 1 segment as well as the type 2 insulin-dependent segment.

That's great. That's a great segue into kind of the pay-as-you-go model and the pharmacy access questions that I have for you. You've spoken to a little bit about the competitive advantages of your pay-as-you-go model and pharmacy access kind of forward. Really how does that further open up the type 2 market? And also, how do you think about if there's any risk that it injects into potential attrition? And how you plan or what's your vision in terms of managing that potential risk as well?

Yes. Calvin, it's a good question. So maybe I'll take the attrition one first and then talk a little bit about how pay-as-you-go and pharmacy really unlocks the type 2 segment. The first thing I'd say is, on the last call, we communicated that 35% to 40% of our new starts are now living with type 2 insulin-dependent diabetes in the United States. So it's a growing percentage of our new starts. That percentage has been in the 30% to 40% range for more than a year now. So we are gaining quite a bit of experience with a growing type 2 user base. And we have been watching attrition and utilization metrics very carefully, and we have not seen a material difference between attrition or retention with the type 2 user and the type 1 user. And I think that highlights just how well suited the technology is to the type 2 user. And so at this point, while we continue to monitor it closely, we don't see a difference in attrition with the type 1 user and the type 2 user, which is great news because we do expect that our type 2 user base will continue to grow because the technology is well suited. As we think about what does it really take to unlock the type 2 segment, I would say it takes 3 things. The first is it takes a very simple technology. Type 2 is a progressive disease. People are often adopting technology later in life, so in their 40s, 50s, 60s. It's not like a type 2 (sic) [ type 1 ] user who has been counting carbs and managing some type of technology from a very young age. So it's very important that the technology is simple and that it's discreet. That is certainly true of Omnipod. The second thing is we need to create awareness among this user segment that they have options available to them. And so we have been investing in direct-to-consumer advertising to help both people living with type 1 and type 2 insulin-dependent diabetes understand the benefits of Omnipod. And then the third is really this affordable, broad access without significant barriers, particularly among the Medicare population. Because of the age demographic of the type 2 user, many of them are covered under Medicare. And so it's important to have broad access for type 2 users under Medicare. And both physicians and patients are more reluctant to adopt new technology in this segment. And so any barriers that we put in front of the physician and the patient in terms of upfront cost, lock-in periods, documentation, all of those things will reduce the number of people that adopt the technology. And so we've been working very hard on all of those fronts. Let's make sure we have the simplest technology in the marketplace. Let's make sure we're creating awareness around the benefits of the technology and data that demonstrates clearly the benefits of the technology. And then finally, let's establish broad, affordable, functional access for type 2 users.

Great. So with nearly kind of 50% of your total U.S. volumes going through pharmacy today, how does that percentage evolve over time with Omnipod 5 only going through the pharmacy? I guess said another way, over the intermediate term, if you will, do you see the pharmacy access transitioning to the vast majority of your business? If there's any barriers that could exist in terms of continuing shifting your patient base over time to pharmacy during this transition?

Yes. Calvin, the primary barrier really is just inertia. Patients adopt technologies in a certain channel and get comfortable with just how their access works. And so that is the primary barrier. We do expect -- we've seen tremendous growth in pharmacy. And we've seen that growth because the channel really provides benefits to every stakeholder. It's easier for physicians to prescribe in that channel. We've really removed cost and risk for the payer in that channel. And of course, it's a more efficient channel for us and it's a better patient experience. And so that's what's been driving the tremendous growth in that segment and why today after just a couple of years, 50% of our volume is going through that channel. I think as we look forward, we would expect that that percentage will continue to grow because those benefits continue to exist and also because we are viewing Omnipod 5 as an opportunity to drive more volume through that channel. Omnipod 5, as you said, will only be available in the pharmacy. It's going to be, we know it is, compelling technology that will drive more conversion among our base and also bring more new customer starts into the funnel. And so that will all go through the pharmacy channel. The other decision that we've made is to price Omnipod 5 at parity to our current generation Omnipod DASH. And so that decision was made in order to provide what we know is really differentiated technology with Omnipod 5, but to continue to drive affordable access for both people living with type 1 and type 2 diabetes in the pharmacy channel. So we will use Omnipod 5 and our decision to price at parity to continue to build the strength of our access and the affordability of our access and the functionality of our access in the pharmacy channel.

Understood. And I think maybe this is a question for you as well as for Wayde potentially. Just high level, what kind of margin impact does this shift to pharmacy channels have on your business across pricing implications and volume implications? Just any margin tailwinds and/or headwinds you can speak to?

Wayde, I'll let you take that one.

Yes. Sounds good. And -- so as Shacey highlighted, the pharmacy channel is one of our top initiatives and provides benefits to the physician, to the customers and the payers and to Insulet as well as you highlight, Calvin. What I would say, the initial impact of the pay-as-you-go model is a headwind to us because we're charging -- there's no upfront charge for the PDM and we do all the training and work in most cases for customers to come onto the product. So it really is like an at-risk model, which is great for payers because they don't have the upfront fee and they only pay for the products. And the customers only pay for the products as they use them. But the other side of that is, we also charge a premium for the pods because we are giving the PDMs away for no charge. And over time, that creates a premium margin benefit for us on the pods in our annuity model. So over time as we move more and more people into the pharmacy channel, it will be a tailwind for us on the gross margin line. And we balance that with other initiatives in gross margin. As Shacey highlighted earlier, a significant investment in our manufacturing area. And we've now built our first stand-alone manufacturing facility, a highly automated facility in the U.S. That will be a headwind for us as we ramp volumes over time, but eventually become a tailwind for us for the business. And so those are the 2 main drivers, both headwinds and tailwinds in both cases. But we have a very strong gross margin today. We're guiding to 68% to 69% for the year. We've got a focus on 70% over time. And gross margin is an important part of our story because it allows for us to continue to invest significantly in R&D and drive innovation as well as selling and marketing in our commercial teams and still drive profitability and increase profitability over time. So glad you highlighted that gross margin, very important to our story.

Great. That's awesome. I definitely want to spend some time on the near-term outlook on COVID, and I do want to move on a little bit to Omnipod 5. So on COVID, looking across our coverage, I think Insulet is one of the more insulated names from COVID just versus other med tech companies that we cover, especially the procedure-heavy names. So can you just maybe walk through kind of the initial headwinds at the start of COVID and how your business model has shifted towards kind of virtual training and being able to offset COVID pressures, how you've been able to do all of that and drive new patient starts and overall just managing material swings or disruptions on a quarter-over-quarter basis.

Sure. Maybe I'll kick us off and talk a little bit about how this has impacted our business and what we've done to mitigate the impact. And Wayde can talk a little bit more about the impact on our financials. But it's been remarkable to see what's happened in the diabetes market as a result of COVID and the impact of the pandemic, particularly at Insulet. The first thing I would say is, obviously, we did see a reduction in patient visits to their physician as a result of the impact of the pandemic. Physician offices were closing down. There was less patient volume. And so it was terrific to see physicians start to move towards telehealth and being able to see patients virtually and continue to get them the care that they need. And that transformation really happened in the endocrinology clinic and in the clinician's office. So of course, we also had to invest in new capabilities and deliver them very quickly to the market to be able to mitigate the impact of the pandemic. And so what we were able to do was implement virtual training tools, the ability to essentially get a new customer, whether you're living with type 1 or type 2, onto the technology without in-person interaction with our clinicians or in-person interaction with a physician. And so this was sort of new virtual training tools, new interactions and protocols with our patients. And it turns out, we were able to do that very successfully. And the feedback from patients has been that they really prefer to be trained virtually, and people are getting off onto the technology in great order. And so this enabled us to deliver, even in this last year, several record-setting quarters in terms of new customer starts despite the impact and the lingering impact of the pandemic in many of our markets. We do see across our markets that we are impacted by the pandemic. We would have more new customer starts today, and we would have had more new customer starts last year without the pandemic, but the team was able to execute on some of these new tools very quickly. And that enabled us to deliver in 2020 our fifth consecutive year of 20% growth, continued growth in terms of new customer starts despite the challenging environment. And this year, again, we're off to another great year of continued new customer starts, many new records in terms of new customer starts despite the fact that we're still training a good portion of our customers virtually. Still, we see reduced patient visits, reduced in-person visits that weigh down on our business. But despite that, we've really been able to execute and perform in light of this challenging environment.

Great. And just broken down by geography, to your point, you've seen record new patient starts over the past couple of quarters in the U.S. But perhaps international markets was not quite as rosy of a picture. Can you maybe speak to what you're seeing in the U.S. market that's working relative to the headwinds potentially limiting more robust kind of new patient starts in the OUS international markets?

Sure. Yes. In the U.S., we've seen multiple quarters now of record new customer starts. That's being driven by a number of things. I would highlight our type 2 segment success. This is an area where we have a differentiated position and where Omnipod adoption is happening faster than other insulin delivery methods. And that's driven by the pharmacy channel and the success that we've had driving more adoption there. And then, of course, DTC and our investment in creating more awareness is driving both new customer starts across type 1 and type 2 segments. So all of that is delivering record-breaking quarters in the United States. As we look towards our international markets, we see a few dynamics that we're not necessarily contending with in the same way in the U.S. The first is, we have had a more pronounced impact of the pandemic, so lockdowns. We see in some of our international markets that Omnipod therapy is typically started in the hospital setting. That's not true in the U.S. And so that has caused more challenges in terms of resources and getting new customer starts. We also see a more competitive and fragmented market as it relates to automated insulin delivery therapy. And some of these markets are getting access to CGM and automated insulin delivery for the first time. And so that's impacting or providing some competitive headwinds. I think in the long term, this is great news for us because it means that we're seeing established pathways for reimbursement and adoption of automated insulin delivery. And we will be in our international markets in short order with Omnipod 5. So it will be good that we have those pathways established for what we think is going to be differentiated technology. But in the near term, it presents some competitive headwinds. And we don't have as broad of access for type 2 users. And so we don't have that same tailwind internationally that we do in the U.S. Over time, we see that as a nice long-term growth opportunity, but it will take time to unlock that internationally. So I would say both of these things, we do see competitive headwinds for automated insulin delivery in both markets. It's just not as pronounced in the U.S. because we have all these other tailwinds that are offsetting it. But I think if we look at it, if we just take a step back and look at both of those markets, adoption and access for automated insulin delivery in the U.S. and outside of the U.S. is a good thing for us. It presents some near-term challenges, but long term it will be great for Omnipod 5 when it hits both of those markets.

Great. I think we have several minutes left. I do want to dedicate some time on Omnipod 5. So FDA approval now, it sounds like it's tracking more towards 1Q '22. And I think you're planning to initially do a limited market release in the U.S. Can you speak to the pieces that you have in place today, awareness, reimbursement supporting the initial launch? And then what are you looking to see to take that from a limited release to a more full market release?

Sure. Yes, we have been making great use of the time that we've had while we've been under review. Obviously, the current environment has made the review somewhat protracted. But the team has made, I think, great use of the time that we've had. So we've been working to do a number of things. The first is to test all of our internal systems around training and support for Omnipod 5 users. We know that this technology is going to be embraced by our existing users who already have experience with Omnipod and may or may not have experience with Dexcom's G6 sensor, where the system is integrated. And it will also attract users, continue to attract users as we do today from multiple daily injections and from other tubed pumps and maybe other sensors. And so we have training pathways for each of those patient profiles and patient journeys, and we've been testing those to make sure that they're ready to go. We have been working very hard to establish broad access. And we reported on the last call that we continue to have success in that front. And that today, even before FDA clearance, which is unusual, most payers wait until clearance to cover a technology, that today we have more coverage established for Omnipod 5 than we did for DASH upon commercial release. And so really good progress there, I think a testament to the wisdom of the decision to price at parity and also the value proposition that exists in the pharmacy channel. So that is great to see. We're continuing to build inventory and continuing to train our teams and kind of get ready for a great successful limited market release. As it relates to what are we going to look for in limited market release to determine whether or not it's been a success and can we expand into full market release, this is standard operating procedure for any new product launch. And we'll be looking to really know, number one, is the patient experience, the customer experience where we want it to be? And so that will be, are all those training pathways working the way that we expect them to? Is the product performing the way that we expect it to? I think we have great confidence on the product performance given the broad clinical experience we have today. And then we're going to want to continue to build access and make sure before we open the floodgates for what we know will be a really enthusiastically embraced technology that we have access at a critical access point so that we're not disappointing people when they reach out to get onboard with Omnipod 5. And we expect both of those things will happen more quickly than they would have if we didn't have this time that we're making good use of today.

Got it. I think perhaps last question, just beyond U.S. approval, how does the global O5 kind of landscape shift post your O5 U.S. market launch? Does that like, how does that set you up for international approvals and kind of pace of launching? Anything you can speak to as kind of an OUS regulatory path front?

Yes. It's a great question. I think everything that we've done to create what has been, I think, a really high quality, large, complex submission through the FDA and our Breakthrough Devices program is leveragable for our international markets. And certainly, the clinical data and the clinical experience that we've amassed for Omnipod 5 is also leveragable. So we shared an update on our Q3 call that that work is underway. Our work to bring Omnipod 5 to our international markets is underway. And we're working very hard to make that happen as quickly as we can. And there are other really exciting innovations coming on the Omnipod 5 platform and work that is underway as well. So our label expansion into type 2, our label expansion for pediatrics, that work is all underway, as well as our work to bring Omnipod 5 to the iOS platform. So this technology really will provide Insulet years, several years of very exciting growth ahead of us and will provide people with diabetes really exciting innovation that's going to bring tremendous value, hopefully result in less sleepless nights, longer, healthier lives and healthy kids. So we're really excited about what this means for people living with diabetes.

Great. With that, I think we're at the top of the 30 minutes. Shacey and Wayde, thank you so much for joining us today. Appreciate your time.

Yes, it was a pleasure. Thank you.

Thank you.