Insulet Corporation (PODD) Earnings Call Transcript & Summary

Great. Good afternoon, everybody, and welcome to the in-person version of the 42nd Annual Canaccord Genuity Global Growth Conference. I'm Kyle Rose. I'm one of the medical technology analysts here at the firm. And I'm very excited to see a pretty good room on a Wednesday afternoon. So thanks for sticking with us. I'm joined this afternoon by Insulet. Insulet is the leader in the pay-as-you-go insulin delivery space, what we view as one of the best technology platforms in the sector in a really compelling differentiated business model. So very pleased to be joined this afternoon by Bret Christensen, the Chief Commercial Officer; as well as Dr. Trang Ly, Insulet's Medical Director. And then we've got the finance questions for Deb Gordon, who leads IR here. So we've got a fireside chat, but I want to make this as interactive as possible. So if there are questions, please don't hesitate to raise your hand, and I'll do my best to weave them in. But just to kind of start, there's a lot going on now that I think makes diabetes as a sector really interesting. And then with Insulet specifically, we've got some really compelling tailwinds with the O5 full market release. That's FMR, not LMR, the big difference in swapping out that one letter. But then we continue to see record patient starts regardless and really have not seen any impact from COVID.

So I guess maybe the place to start is just a quick recap of the Q2, some of the market dynamics you've seen in the first half of the year. And then as we transition into the second half, what should we really keep in mind?

Yes. Kyle, thanks for having us. So Q2 was really about Omnipod 5. And there are those acronyms, LMR, FMR, which we're glad to be done with because at the end of Q2, actually just after the Q2, we entered into our full market release of Omnipod 5. But all the tailwinds and the strength of Q2 was an Omnipod 5 story. So we said a couple of things. We said we had a record number of new starts on product in the U.S. and worldwide, and the U.S. was driven primarily by Omnipod 5, even though we were still in a limited market release in Q2. So we opened it up for anyone to write a prescription and any patient to get on product as long as they did so in a limited distribution network. And in spite of that, we still saw 25% of new starts in Omnipod 5, and it scaled pretty aggressively throughout the quarter. We exited Q2 at a much higher rate as a percentage of new start, and that really was the strength and the story of Q2.

And one of the other questions coming out, and I realize I've got the Commercial Officer here and the Medical Director. So I'm not going to get too in the weeds for financials purposes. But one of the big things coming out of that was you did make some comments about margins over the near and medium term. So maybe just kind of remind us what that, I guess, reset of expectations was and kind of the overall driver behind it.

Sure. So years ago, we set a goal and a guide that we would get to 70% gross margin. We did so, but we're not immune to some of the macroeconomic environment and issues that are going on. So inflationary pressures with cost of components. We called out a warranty issue, which was really a battery issue that we had with our PDM that we had to account for, for the rest of the year. And then just really product and manufacturing mix. As we manufacture more in the U.S. and have more Omnipod 5, there's slight pressures there as well. But we're committed to getting back to 70%, but we did say that at least for the remainder of the year and into next year, we've already got inventory that we're building now that will be for next year. So we have really good line of sight in gross margin, and we do expect those headwinds to persist for the next little while.

Okay. And then the last 2 more near-term questions before we get into the actual fun stuff is just when I think about an inflationary environment, particularly for consumer-focused paying goods, historically, we had DME and it was large out-of-pocket expenses in times of tightened consumer discretionary spending, maybe they would delay an upgrade. How, if at all, are you seeing any inflation impact to patients now with the pay-as-you-go model with just like a regular pharmacy co-pay? How should we think about that risk in this model in this environment?

We're not seeing it in the way others do because of our pay-as-you-go model. And so as you know, Kyle, years ago, we made the decision to remove the lock-in period for patients where they're not locked into technology for 4 years, and we gave up the upfront fee, the bill to payers. So what it means is a really predictable, low out-of-pocket cost for patients in the pharmacy channel, where the vast majority of our patients pay something less than $50. Many pay 0. That's really an important component of our success because as there are pressures, economic pressures and patients are feeling that, they don't have the cost burden with Omnipod the way they would with a traditional tubed pump.

Okay. And then on COVID, is that still really an impact on the business? Are we still seeing challenges for patients to get into physician offices and get scripts written and get on product? I know that you and the industry have made huge strides as far as patient onboarding and them being able to do it on their own and self-teaching, some of the things that used to be done by nurses and things of that sort. But is COVID an impact? And I guess that's a question both in the U.S. and internationally still.

It hasn't gone away, but the way we described it is sort of the new world and the new way of doing business. And so we have done a really good job operating with COVID pressures, where the majority of our trainings are virtual trainings. With Omnipod 5, we develop self-service tools. So anybody coming from one of our legacy products has the ability to self-serve and self-start on Omnipod 5. That's tremendously helpful. And we didn't call it out because we were not feeling it, it's really -- frankly, it's hard to feel COVID and economic pressures in the midst of an Omnipod 5 launch where demand and excitement is just so high.

That's fair. And that's a perfect segue into Omnipod 5 itself. So maybe Trang, I want to give you a second to comment as well because I know you were instrumental in both the trial design, but also the algorithm development as well. So maybe help -- this is more of a generalist audience. So help us understand what's different about Omnipod 5 relative to DASH. And then what's different between Omnipod 5 relative to the other AID systems we've seen in the market?

Yes. Thanks, Kyle. So I've been involved in Omnipod 5 for 6 years now, and there is really no other product like it on the market. It is the only tubeless automated insulin delivery system. And so before the advent of AID systems, as we call them, pump therapy was very much manual. And so you set rates, and then you get that insulin delivery, and there wasn't that feedback from continuous glucose monitoring feeding in and dynamic insulin delivery. And it's really only recently that there have been other products that have come to market that have been able to automate insulin delivery. But ours is differentiated in that it is the only automated tubeless system where the algorithm is on the Pod itself, and what that means is a patient can wear a Pod and a Dexcom G6 sensor on body and be in full closed-loop control 24/7. So they don't need to remove their pump to shower because it's a waterproof device, and they can stay in closed-loop control. And what I'd say also is that we have taken the time because we are third to market with an AID system to really improve the user experience. And what I mean by that is making sure that we're not pestering patients with unnecessary alarms and doing our best to reduce the burden of care for people living with diabetes. I don't know if many people in the audience really know what it's like to live with diabetes or care for a child with diabetes, but it's incredibly burdensome. When you have a 2-year-old who is diagnosed with diabetes, it will completely change that child's life. It will change that family's life forever. And it's just incredible the advances we've seen in diabetes in terms of the CGM technology and in pump therapy. And then without innovation, it is a type of next-level innovation at bringing tubeless AID to market. And so it's been much anticipated. And honestly, the response has been incredible. People have been talking about how incredibly life-changing this technology is. And it's not a word that I throw around lightly, but it really does transform the ability to care for diabetes, and it frees up so much of that cognitive burden that people carry when they're diagnosed with diabetes, and it's something that we, as a society, don't really talk about and acknowledge. So yes, it's been phenomenal. And the launch, it's been super exciting to see the thousands of patients who have been able to get on our product and see the phenomenal results that we've seen in the field. So super exciting.

And being a clinician yourself and working on the research side of things, when you've -- we've seen multiple cuts of the data, right? We saw it at ENDO last year. We saw more at ATTD. We saw more at ADA. What's the -- what resonates most with your peers and clinicians that you're showing the data to or -- and even the real-world experience you've seen in the first, I guess, 8 months of the limited market launch and the first week of the full market launch.

Yes. I think with other systems that have come to market, I think the results in the trials were not necessarily replicated in real life. And I think that really comes down to the user experience. So what we've done at Insulet is really optimize that user experience to make it simple and easy to use and also is the only system that is adaptive. And what I mean by that is that the algorithm learns over time based upon the total daily insulin. So if you are in need of more insulin, the system will adjust insulin delivery to give you more. So if you've got a growing teenager or a newly diagnosed patient who's coming out of honeymoon and you need more insulin, our system will automatically adjust. And the reason why that's so important is because we can't expect patients to go back and see their physicians every 3 months. Like nobody has time for that. Our systems just don't have that level of capacity. And so it's important for us in terms of our technology and our model that we are able to provide differentiated AID technology that also grows with the patient and, to some extent, requires less tweaking than some of the other systems. And so we have really built it for that longevity. And -- because with our payment system, if someone is not happy with our system, they stop using the product, then we lose a customer. That's a big deal to us. So for us, it really matters that user experience, how easy is it for them to get onto the product, start the product and then how well does it work for them long term. And so I'd love that people are not talking about things like annoying alarms or they're not talking about hypoglycemia because we designed that out of the system. And that's a really phenomenal achievement, I think, that we've been able to bring to the diabetes community as a company.

Yes. And one of the things that surprised me on the Q2 call was 25% of your patients were already on -- that seems like a lot for a limited release. So maybe kind of help me understand how the limited market release progressed, like what you've learned and what made you comfortable to say, "All right, let's move into the full release here." I know we were ready as investors. But...

We are ready, too. It's been a long time, and it works. But we did say LMR, the limited release would be somewhere between 3 and 9 months. So we sort of split it right down the middle and got to full market release within 6 months. But one of the things we learned -- remember, the first phase of the LMR was just a few hundred patients, and we didn't onboard any new patients. We wanted to test the onboarding experience, training, a lot of things we were looking at before we open it up for any physician to be able to write a prescription, which we did in Q2. And then everything just sort of accelerated for us then. What we did is we -- we said the average -- I mean, the -- 25% of all of our new starts were Omnipod 5. So you can imagine it scaled quite dramatically throughout the quarter, and we exited at a much higher rate than 25%. But I think Trang will say, "I told you so" because she knew demand was going to be really high for this. It probably was above even the high scenario for us for both new starts and conversions. And it makes sense because it's just been so anticipated and everybody's been waiting for Omnipod 5. We have Podders who have been waiting for it for years, and they're all eligible because none of them are locked in to old technology. And so if they've got a prescription, they've got access, they can get on Omnipod 5. And what we're excited about for the start of Q3 is we're entering now a full market release, which just means the retail channel will have availability. And so you can you go down to your corner pharmacy and get Omnipod 5, both the starter kit, which includes the PDM, and the supply of Pods. So the distribution network is vast, and we're ready to start really full promotion and to scale it.

Yes. And when we think about that push, I mean, is it just opening up the floodgates and letting patients go pick it up at the pharmacy? Or is it you've got new direct-to-consumer campaigns that you're pushing patients out? I mean obviously, there's a big contingent of patients waiting for it, right?

Yes.

That's clearly evident based on what we saw in the Q2. But what drives the compelling adoption when we think about the second half of the year?

We'll focus on all those things. So access is open. We've got to continue to build reimbursement. We said we were about 55% of covered lives, which is way ahead of where we were at with DASH, our previous product, at this point in time. So we're excited about the progress we've made there. We're probably at a point now that we originally thought we would be at, at the end of the year. So access is going to be really good for patients. Promotion is going to pick up. We've already started running some TV commercials that highlight the Omnipod 5 message. That's really exciting for us because we've got to build awareness for Omnipod as a whole, but it's really exciting to finally be talking about AID. So you'll see all those happen in Q3, and it's exciting to see where we're finally at, and we can finally stop talking about limited release and any sort of barriers to entry.