Insulet Corporation (PODD) Earnings Call Transcript & Summary

All right. Good afternoon. I think we're going to get started here. Thanks for joining us, and congrats on passing the COVID protocols. My name is Jayson Bedford. I cover medical devices here at Raymond James, and it's really our privilege to have with us the senior management team from Insulet. With us, we have the company's CEO, Shacey Petrovic. We have the company's CFO, Wayde McMillan. And Deb Gordon, VP of Investor Relations, is down in front here. So with that, I'm going to hand it off to Shacey, and then we'll jump into some more interactive Q&A.

Great. Thanks, Jayson. And we appreciate being here, you hosting us and for the opportunity to share some opening remarks. What I thought I would just share is, it is an incredibly exciting time today at Insulet. And for our company and for our customers, which you'll see on the screen behind me, these are Omnipod users, who affectionately call themselves Podders, and they represent now the estimated 300,000 people across the globe who are relying on our technology and getting better quality of life and better outcomes as a result of Omnipod. And they are the reason we do what we do every day. Our company was founded 20 years ago, a little bit more than 20 years ago, with a mission to improve the lives of people living with diabetes. And we do that through our technology platform, Omnipod, which is the small, discrete, wearable pod that you see on these patients' arms and abdomens and legs. It's waterproof, and it delivers 3 days of nonstop insulin. And the on-body experience is really second to none. It really provides discretion, ease of use and better outcomes. We just finished a pretty extraordinary year in 2021. In 2021, we passed $1 billion in top line revenue, and it was our sixth consecutive year of 20-plus percent growth on the top line. So most importantly, in 2021, we also delivered consistent, record-setting new customer growth. And so that means that we were able to bring our technology to more people across the globe and help them get better outcomes. We also expanded internationally and made great progress on our strategic imperatives. Diabetes is a growing global epidemic. Across the globe, we see growth or an epidemic status for both type 1 and type 2 diabetes. And today, we are in 22 countries across the globe. We estimate the total addressable market in those countries to be between 11 million and 12 million people who would benefit from Omnipod. Very uniquely positioned, our technology is highly differentiated. It's patient-preferred, and it has an improved business model. And you can imagine compared to the alternatives out there, which are multiple daily injections with a needle or an insulin pen or a more traditional tubed insulin pump. It is a patient-preferred technology. And today, most of our growth is happening as a result of Omnipod DASH, which is the handheld controller and the pod that you see there. And although it's just a few months into 2022, we've actually had some pretty exciting milestones accomplished. And most notably, we received FDA clearance of Omnipod 5, which is a game-changing technology. It is our first automated insulin delivery system. And it is the world's first automated insulin delivery on a pod and that also delivers personal smartphone control with a compatible device and the algorithm on the pod. So a technology that is highly differentiated, we believe, will fuel the next horizon of growth for us. Omnipod 5, we are also working to invest in and develop that platform over time. So we have also submitted to the FDA for our pediatric expansion. The original label that we launched with -- this year is down to age 6, and we will expand that down to age 2. We've also submitted and are under active review for a CE Mark approval. So we could not be more excited about 2022 and the years to come, a lot of runway for growth and a lot of growth that will come as a result of innovation and international expansion. We have a patient-preferred form factor. We have a highly differentiated business model, which I'm sure we'll talk about. We have also invested to ensure that we have the manufacturing scale and redundancy, which we believe is particularly important in the world that we're operating in today, and a team that is supporting an incredible customer experience through the pharmacy. So I'm sure we're going to touch on all of those topics today in our conversation, but I appreciate the opportunity to make some opening remarks. Thanks, Jayson.

Thanks, Shacey. Good job. So I feel obligated just to ask and get the question out of the way. But in terms of exposure to Russia, Ukraine, can you just make any comment on that?

Yes. Yes. So our company has no revenue tied to either of those countries. We're not in Ukraine or Russia. We also don't operate or have any key suppliers in those areas, so limited risk from that perspective. We do have a couple of contractors that we know have been safely relocated and are safe. I think the bigger picture is what does this conflict do to the supply chain? And there are key areas that we're watching very closely. As you think about the impact on various components, resins, European freight, the impact of inflation tied to the war. So those things -- we have a team of very talented people that are monitoring and deploying tactics to mitigate risk in terms of advanced buys and just general management of that risk. But no notable key risks to the business in terms of revenue.

Okay. Perfect. So let's go with Omnipod 5 because that's a lot more interesting. It's been a few weeks on the limited market release. It seems like the feedback that we've seen has been good. But can you just comment on some of the feedback in a little bit more detail, both the good and bad, to the extent there is any?

Yes, sure. So on our call, we had noted that we were then, at that time, about 3 or 4 weeks, I think, into the limited market release. Very exciting feedback that we were getting, which is essentially that users were delighted by the product. Some of the areas that we had invested in to deliver what we believe are game-changing or leapfrog type of features like multiple set points like the CGM-informed bolus calculator. And like the benefit of having the algorithm on the pod, meaning that nobody has to disconnect from automated insulin delivery. Those are features that we continue to get just extraordinary feedback from users on. And so not much has changed since the earnings call. I would say, we're kind of getting the same level of positive feedback but just a lot more days -- user days under our belt. I think we had talked about, Jayson, our goal is to get a certain number of user days across each patient archetype and to really ensure that we've got a great product feedback across each of those and then also great feedback on the support systems. And that's really where we're learning the most. The product, one of the benefits of the lengthy review cycle that we had because of COVID is that we now have had hundreds of people on the system for the better part of 2 years. So no surprise that the product is delighting our users. Where we have focused really is on the systems, the supporting systems around training and onboarding. And this ties to our business model. So if you think about the uniqueness, one of the things that has been driving our growth over the last few years and what has made our growth so durable over the last 2 years that, even in a pandemic, we have grown 20%, 20-plus percent is because of our business model, which is this pay-as-you-go business model in the pharmacy setting. A huge advantage. It's made the technology more accessible, more cost effective for patients. But what it also means is that there are no barriers to adopting new innovation. So unlike our competitors who lock people into a 4-year contract or charge large upgrade fees to adopt new technology, our users can get on to the next innovation without delay, right? No time requirement, no upfront fee. And what that means is we've got well north of 100,000 users in the United States. As soon as their insurer covers it, everybody is eligible. And so we've spent some time the last, really, few years developing systems to ensure that people could self-serve. So if you are a current Omnipod user, current Dexcom user, you can get on to our product with a 100% digital pathway without having to meet with a clinician or be trained by a field representative. And what that enables us to do is focus our field team on continuing to deliver record-setting new starts and enable our existing base to upgrade on their own through these self-service digital pathways. And those are the systems that we're really testing, getting a lot of feedback on, learning what's working, what might need to be tweaked, et cetera.

And I think you've talked about the limited market release lasting anywhere from 3 to 9 months. If it lasted longer, what do you think the reason would be?

I think, in my head, 3 to 6 months means everything goes perfectly, right? So we've got patients across each patient archetype, we call them. So are they a current Omnipod/Dexcom user, in which case we are testing that full digital pathway, no human touch, able to get onboarded and trained on the product. And then you have Omnipod CGM-naive patient, Omnipod Libre patient. You have a tubed pump Dexcom patient, a tubed pump CGM-naive patient and an MDI user. And across each of those pathways, there's a different level of automation, self-service and support. So I think if it were to go longer, it's probably not the product. It's probably not access. It's probably learnings in terms of that systems and support. And depending on how significant those learnings are would lead us to 6 to 9 months or potentially longer.

And can you just talk about access and in terms of kind of where you are today, where do you want to be exiting the year in terms of kind of payer coverage and access?

Sure. Yes. What we shared on, I think, 2 calls ago now is that we had more access established for Omnipod 5 today at that time, so prior to FDA clearance, than we had had for Omnipod DASH when we were moving into full market release. So really successful in terms of establishing coverage. At full market release for Omnipod DASH, we were somewhere between 30%, approaching 40%, very quickly moved to 50% coverage. That's kind of the neck of the woods that we were in. And to me, it just demonstrates the wisdom of the choice to price Omnipod 5 at parity compared to Omnipod DASH because that's what's enabled us. We brought what is game-changing technology, what we know will be enthusiastically embraced in the market, and we've delivered it at the same price for our users at price parity as Omnipod DASH. Today, the vast majority of our users access Omnipod for $50 or less per month than the pharmacy. And so that's the same cost as multiple daily injections for most of our users. So pretty remarkable to bring this level of technology for that type of monthly copay, and that's how we were able to establish such broad access even before FDA clearance. So we don't think that that's going to be the governor. We will continue to build, and it will take time, but we think we're going to be in a strong position when we are ready to move it to full market release.

Okay. And in your discussions with payers around Omnipod 5, did the economics change to Insulet at all?

Not really.

Not from a payer's perspective, still a huge benefit, both short and long term. So from a short-term standpoint, the same benefits exist and even stronger with Omnipod 5, where you've got less hospitalizations, less trips to the emergency room, and then, over the long term, obviously, greater benefits of time and range and lower A1cs, lower use of insulin. So the benefits just grow with Omnipod 5. As Shacey said, significant more value at the same price. One thing to watch for is on the cost of goods sold side. So from an economic standpoint for us, we did decide to put some technology into Omnipod 5 that's at a higher cost. The biggest piece is putting a SIM card in the controller. So if a customer is using the controller that we give them, we've got a SIM card, and that way, we still have access to real-time data. If they use a smartphone, obviously, we have real-time data in the cloud. And then we also have more technology in the pod to run the algorithm, which comes at slightly higher costs. So that will be a slight headwind to gross margins over the Omnipod 5 ramp. But of course, all new products come with a bit of a headwind as you're ramping up volume, and our teams do a good job of driving efficiencies over time. So as we ramp Omnipod 5, there will be a slight headwind to gross margin from our economic standpoint.

But it sounds like the headwind is more just on the inefficiencies tied to the ramp, let alone -- or versus the added cost to manufacture a product. Is that fair? Or is it both?

It's both, but it's slight. And it's not significantly less than DASH. And so we're still on a program where we're pushing for 70% gross margins. We were just shy of that in Q4 this year. Our operations team is pushing hard, and we're a few basis points away. And so we're going to continue on that road. What I would say is just a heads-up, we talked about this on our call, that given the supply chain environment that we're in over the last year, we went and bought ahead and did longtime buys at a premium to make sure that we had capacity and product to be able to drive capacity for what we know is going to be ramping into Omnipod 5, and we didn't want capacity to be a constraint for us. So we've got some higher price or cost built into our inventory right now that will also be a bit of a headwind as we work through 2022. But having said that, we also have quite a few tailwinds in gross margin. Our operations teams are doing a great job. We have a price premium in the U.S. as we move customers into the pharmacy channel. And then our growing scale and volume brings efficiencies. And then we've invested in a U.S. manufacturing facility, which is gaining efficiency every quarter and improving. But because it's such an automated facility with high fixed costs, we're -- as we move volume into that facility, it's still a bit of a headwind for us. But of course, once we get volume high enough, that will also begin to be a tailwind. So...

Just one last thing on gross margin, Wayde. I think you said you acquired one of your suppliers in the quarter. Can you just comment on what that does to gross margins?

Yes. So a really exciting vertical integration of our supply chain. And so this is a supplier that we've been working with for over a decade. They have some really unique manufacturing capability and intellectual property. And so we felt both to solidify our supply chain as well as to bring some of that intellectual property in-house that we go ahead and make the acquisition. It will have a small, favorable impact to gross margin over time but not significant over that first couple of years, the company was gaining some margin, and so we'll take advantage of that. But this was more a strategic move from a vertical integration of our supply chain where we saw both efficiencies and intellectual property advantages.

And can I assume that manufacturing won't be a gating factor to the Omnipod 5 rollout?

Yes. That's right. And we explicitly stated that on the call. I think we really leaned in last year, and you saw us grow our inventory position also of raw materials and component supplies. So we're in a really good position. And I think, in addition to capacity, we have redundancy and resiliency in the supply chain. That's been a big push of ours over the last few years, and I think we're in a really strong position as we head into this launch.

Okay. So historically, when a person with diabetes made the decision to go from MDI to a pump, the first decision in this tree is pumped -- or sorry, tubed or no tube. Do you think that, with Omnipod 5, you can kind of wedge yourself in and discourage someone from going to a tubed route here? Historically, again, I thought the market were -- you guys were swimming in different lanes. I'm just wondering if you can start jumping into the other lane?

Yes. Well, our market research would demonstrate that people don't really select tubes. So what they're selecting for is some feature that Omnipod doesn't have because if you put both form factors in front of a patient, they will choose Omnipod. The challenge is twofold. One, are they already using a tubed pump, in which case, there's some inertia because they've already worked their lifestyle around the limitations of a tubed pump. And the second and much more common, when it's coming from multiple daily injections, is the lack of automated insulin delivery, the lack of CGM integration. So on that front, with Omnipod 5, we are delivering to the market what we believe is the best technology by far. It's delivering a number of firsts to the market with phone control, with multiple set points and with the algorithm on the pod, among others. So we do believe it puts us in a much stronger competitive position and that there really isn't a reason now to select an alternative pump. And so most of the market research supports that, and we're pretty excited to see what that will mean in terms of where our new customer starts come from as we get the product into the market.

So just on that point, historically, share shifts within the pump market would be in the tubed space. I'm just wondering, from a marketing perspective, with Omnipod 5 available, will you be a bit more aggressive in going after that tubed patient?

I would say, yes, but I guess I would caveat that. The first thing I would say is still, today, the largest opportunity out there is the multiple daily injection user. Still, today, somewhere around 1/3, even in the United States, the most developed market out there, somewhere around 1/3, 35% of users are using a pump. So the biggest opportunity out there is the multiple daily injection user. It's 2/3 of the market. It's why we invest in DTC. It's why we focus so much on simplification of the technology because we believe that's what will help us unlock millions of users, not just hundreds of thousands. And the third piece is awareness. And we know there's a huge opportunity there, and we've been investing there. So it will still be a primary focus of us -- of ours. I think what's exciting is the business model. So the fact that we have moved to pay-as-you-go in the pharmacy channel means that anybody can move on to this technology. Any tubed pump user that just bought Tandem yesterday, right, will be able to adopt Omnipod 5 tomorrow once their payer covers it. So we know we've got a preferred technology. Our job is to educate on the business model so that physicians and users understand what their options are. And we've got a number of tactics that we'll deploy to make sure that everybody understands what those options are. And I think you'll see us get, just by nature of that, much more competitive.

And I think you talked about on the call the OpEx spend, which I'm assuming is largely on the sales and marketing line, will grow just south of revenue growth. So can you talk about some of the sales and marketing initiatives you plan on? And is there a bump in the sales force as well tied to the Omnipod 5 launch?

Yes. Maybe I'll start with the sales force and then we can talk about the other things that are contributing. We actually think we're pretty rightsized from a sales force perspective. So we are increasing but not significantly. A lot of our investment over -- if you just think about these companies and the market that we're in, in the United States, there are only about 5,000 endocrinologists. So every company that serves this space, whether you're a pump company or a CGM company, we have very large sales forces relative to the population of clinicians. We've got very good coverage. What we decided to do and started to invest in now years ago was around that self-service and automation. And we believe that if we can provide a great customer experience through self-service where a new user doesn't have to pick up the phone, doesn't have to be trained in person by one of our reps or one of our clinicians, that that's going to provide -- if we do it the right way, it's going to provide a better patient experience, and it's going to enable us to have great cost-effective scale. And so that's a lot of what we're testing in our limited market release, and we believe that will set us apart as we think about more rapid innovation cycles and continued expansion of the market. We think that puts us in a really good spot. So that's been an area of investment, less so than additional headcount in the field. And then Wayde, I don't know if you want to talk about DTC...

Sure. Yes. So several other areas of investment, as Shacey said. Direct-to-consumer is an area that we've been investing in for about 18 months, we started piloting and then it moved into more targeted direct-to-consumer spend and digital spend. And you should expect that to ramp to support Omnipod 5 ramping this year as well. And then we had a lot of clinical resources within research and development that now move into the marketing -- selling and marketing line on the P&L because they're now supporting post-market clinical trials. Shacey called out quite a few of them, pediatric extension, type 2 extension and ongoing work in that area as well as the marketing team's ramp-up of programs as we get ready for the year of Omnipod 5 ramp here. So a lot of investment, as you said, Jayson, in selling and marketing. We can't forget the international expansion as well, significant investment to continue to expand the business internationally. And then from an innovation standpoint, as Shacey said, there are continued innovation here and significant investment in R&D as we continue to build the pipeline. And then to a lesser extent, we are driving leverage within the G&A functions. But given the rate of our growth as we cross $1 billion globally, we need to continue to invest in the infrastructure to support the growth that we think we will see and continue to see for years to come.

And when does the DTC start ramping a bit more aggressively?

It's not sort of a flip-of-the-switch type of thing to think about. As we move from limited market release into full market release, that's when you should expect us to start to increase direct-to-consumer spend to support that ramp. But it's something we have to keep an eye on because we know when we open up for full market release and open those floodgates, there's a lot of opportunity for people to come on to the product. Shacey just highlighted them, our existing user base, other MDI conversions, potentially competitive conversions. So we want to make sure that that's happening in the most efficient way, and we don't want to overrun things by driving direct-to-consumer advertising ahead of when we're ready for continued adoption.

Just on the floodgates, your words, is there an element of prioritizing users here? Or if you're unconstrained from a manufacturing standpoint, is it pretty much, hey, whoever wants it will get it?

Yes. Today, we're prioritizing just to make sure that we recruit enough user base across each patient archetype. As we move into full market release, we won't prioritize that user. So we will literally open the gates. We will control the channel a bit. So if you think about how the pharmacy works, it's a bit complex, right? You have wholesalers, you have mail order, you have specialty pharmaceuticals, and then you -- or pharmacies, and then you have retail. Once we get into retail, we kind of lose visibility and control, and so we will cadence the channel out as we move towards full market release, but we won't prioritize certain groups of patients over others.

Okay. New users from the type 2 community have kind of averaged in the high 30s in terms of percentage of new users added each quarter. Does that change now with Omnipod 5? Does that get diluted a little bit as you have a rush of type 1s?

Yes. I mean we may see the percentage go down and, frankly, we'd be just fine with that. It's been an incredible thing to see that segment of the user base really start to convert and embrace Omnipod. This is a patient segment that has historically been viewed as noncompliant, where physicians and payers were reluctant to offer pump therapy to. And Omnipod changed all of that. Omnipod DASH in the pharmacy changed that. And it's because we were offering this technology with no upfront cost, no lock-in period and a free trial. So we went to a bunch of physicians and said, "Hey, for these patients who are sitting at a 9, 10, 11 A1c, you're just giving them more and more insulin, you have not -- you don't have a solution that's working for them, try Omnipod. You can try it for free for 30 days." Physicians, historically, have been reluctant to saddle this patient population with an expensive, complex technology, and they gave Omnipod a try, and it worked beautifully for those patients. We've published the data that demonstrates improved outcomes, reduction of total daily dose of insulin. And payers are onboard because of our business model. And so that's what's helped us to drive that growth. None of that's going away. We will continue to see that population continue to thrive on Omnipod, which we're excited about. But what is happening is Omnipod 5. So we are going to be focused, our field team, on growing that in the type 1 space. And so that may skew percentages because we could see rapid growth in the type 1 space that might then make the percentages look off, but we fully expect the type 2 user group to continue to grow.

And we're bumping up against our time, but maybe a bigger picture question, Shacey. Tandem, at their investor event in early December, talked about pump usage going from, I think, 1.3 million users to 2.9 million users by 2027. The read-through there is, I think it's about 14% market growth over the next 6 years. Is that something -- is that a number you agree with? Do you see the market differently? I'm just kind of curious as to your bigger picture market growth.

Yes. I mean I think it's in line. What we've always said is that we see in the United States the type 1 market doubling in terms of the pump utilization and pump penetration. So I think that's in line. And I think the other area that's exciting for us is type 2. As CGMs start to train their sites, and they have been doing this now for a little while, onto the type 2 user, we see CGM utilization increasing, and that drives Omnipod adoption. It's what's happened in the type 1 space. So we're at the very early innings of the type 2 space. So it's nice. We see this inflection point with AID, with Omnipod in type 1. Omnipod is driving that in Type 2 as well, and we see that as sort of the next horizon of growth. So it's a pretty exciting time in our space.

And just type 1 doubling, did you give a time frame on that?

No, we just said in the next several years.

Okay. Okay. Okay. Perfect. Thank you so much, Wayde and Shacey. The breakout will be downstairs. Thank you.

Great. Thank you.

Thank you.