Insulet Corporation (PODD) Earnings Call Transcript & Summary

Great. Good afternoon, and thank you again for joining us. Welcome to the, again, second day of the Morgan Stanley Healthcare Conference. I'm Cecilia Furlong, a medical device analyst here at Morgan Stanley. It's my pleasure to have Insulet with us today, CEO, Jim Hollingshead; CFO, Wayde McMillan. Really quickly, just disclosures, please see morganstanley.com/researchdisclosures. With that, again, thank you both for being here today.

It's a pleasure. Thanks, Cecilia.

And I guess to start, just kind of looking at how you're thinking about the business. You had an experience, I think, and would love to kind of hear your perspective, taking in what's traditionally viewed DME type of product and really layering in a lot more of technical component software, either kind of shifting the message, shifting the mentality around that. How do you think about where Insulet is today in that process, your longer-term outlook? Just would love kind of your high-level thoughts.

Yes. Thanks, Cecilia. So I'm really bullish on where we're headed at Insulet. And I think what you're probably referring to is I spent 12 years at ResMed. And one of the reasons -- so I've been on the Insulet Board for about 3 years and was asked to step in as new CEO, it's going on 120 days. I think the announcement was made in May, and I joined June 1 as CEO. And prior to that, I was leading the Sleep and then the Sleep and Respiratory Care business at ResMed. And one of the things we've done in ResMed was put a cell chip on every CPAP device, which allowed us to virtualize care to do remote monitoring and do other things. And the reason Shacey and the Board asked me to join the Insulet Board was because that journey that ResMed was on was very similar to where Insulet was headed. And so for the last 3 years, I've had the opportunity to have a bit of a hand in the Insulet strategy. And you can see, I think, where we're going. You can see in the DASH offering, especially now with Omnipod 5, that so much of the offering is actually it's -- we have the best AID device on the market, and I'll talk a bit more about that. But it's a cloud-based offering. And so it generates a lot of data. And that was something we learned in the ResMed journey was that once we had a lot of usage data from therapy, we could do really useful things with it. So if I just step back and say where is Insulet, well, first, we're so excited because we're playing in a market that's got a huge public health need, type 1 and type 2 diabetes, massive global pandemic, really underserved and underpenetrated with advanced technologies. We've been competing in that space very successfully with our Omnipod platform, most recently and globally with Omnipod DASH, which is a wearable, disposable, tubeless insulin pump. And we've just entered full market release or a full market launch with the Omnipod 5, which takes all of those form factor advantages and adds in automated algorithms that deliver true automated insulin delivery. So fantastic automated hybrid closed-loop insulin delivery that keeps patients in time in range and manages their highs and lows really, really effectively. But the other thing Omnipod 5 does on top of that is it allows for real-time data feeds from patient usage. And that enables a whole lot of things that we can do usefully with the data. So Omnipod 5, and I'm sure we'll get into this more of the questions, Omnipod 5 is a category-killer product. It's the easiest to use on the market. It delivers fantastic clinical results. It's -- the form factor is strongly patient-preferred. The data flows simplify care for physicians. And what we can do over time with that data is actually improve the patient experience, improve workflows for physicians and providers and eventually do things like population health management. And so best offer in the market now and going to a lot of offerings for the full ecosystem that will not only improve care, lower cost but also dig a very deep moat around our offering.

Okay. Thank you for the overview. And stepping back into kind of the macro as everyone is very focused here, and I think it seems you've been more insulated from a lot of the dynamics. But as you think about just the inflationary component costs that you've talked about from a margin standpoint, has anything shifted in terms of the landscape you're seeing today? And then longer term, as we look to '23, if we're still seeing pressure, as you think about O5 ramping specifically in the pharmacy channel, how does that act as an offset to some of the pressure you could be feeling from the component side?

I think I'll throw those to Wayde.

Yes, sure. So we certainly are seeing the inflationary impacts that other companies are seeing and talking about. One of the things that is different for us, I think, is we're entering this really exciting chapter, as Jim just articulated, for Omnipod 5 and the launch and the ramp. And so in this environment, we've taken steps to build inventory. In fact, we've built inventory through the pandemic, and now we're building inventory through the supply chain inflationary environment. We're doing that to make sure that we've got all the components and all the inventory we need to ramp our business. And so it's sort of the opposite approach others are taking. We're actually taking longer-term views to our components and purchases. And what that ends up impacting us is double-digit increases on some of our most expensive components. But we're willing to do that trade-off every time because we see this real opportunity for us, a real inflection point for the business behind Omnipod 5. We also see other inflationary impacts down the P&L like other companies are. And specific to your questions, Cecilia, I would say we haven't seen anything acutely shift here in the midterm or even the short term, especially for those longer-term buys where we're locking in pricing to make sure that we have components for the long term for our product. And so we're making some specific choices to impact our gross margins to make sure that we've got inventory and supply for our customers for a long time. And so as a result, we're going to continue to fuel this growth inflection that we're in. It's going to be at slightly lower gross margins for a period of time. But again, we'll take that trade-off every time. And we were at 70% gross margins in beginning of the year, and we're going to get back to those eventually once we get on the other side of this inflationary environment. And as you pointed out, scaling, in particular with Omnipod 5, volume is the single biggest lever for us to continue to improve our gross margins over time. So that will be the 2 things we're balancing, the inflationary headwind as well as our tailwind we get from scaling the business, and that will really dictate where our margins shake out over time.

I'd just add to that on the commercial side. So Omnipod 5 is off to a fantastic start at launch. Demand is really high, it's high across the board. Our target patient is patients who are currently doing MDI, or multiple daily injections. And we're in terrific demand. We're servicing a lot of MDI patients who are self-serving in our virtual onboarding. We're also getting a lot of converted patients, both from our own Omnipod DASH product and from competitor pumps. And so off to a great start. Your question might have been partly aimed at what happens in an economy that's uncertain with inflationary pressures and so on. What we learned during COVID is that our business model is really resilient. And so if you -- we have some advantages related to pricing and channel. And so access for patients that don't have a big co-pay, unlike a tube pump, there's not a big capital cost on the front end of therapy for us. I think there's no real capital cost. The Omnipod offering is effectively all disposable, all consumables. And so there's no big upfront cost for a payer. There's no big upfront co-pay for a patient. And then there's the monthly co-pays. Our average patient pays much less than $50 a month for therapy, which puts it about on a par with MDI. So there's not a big economic barrier. And what we learned during COVID is that that's very resilient, and I think especially resilient against some of our competitors.

As you think to the O5 onboarding experience to DASH O5, I think you've automated a lot of that process. But new patient starts, are there any kind of, as you sit here today, bottlenecks in other areas to work through that have kind of maybe mitigated or could pressure new patients start, at least over the near term?

Yes, it's a great question. I think what we're seeing is new customer starts are terrific and demand is very high. And as you say, there's -- the self-conversion of DASH patients has been pretty good. And we've learned a lot through the limited market release. One of the things we were doing through LMR, as we call it, is trying to understand the patient journey for somebody coming from MDI, somebody coming from DASH and somebody coming from a competitor pump. And we use the LMR period to tweak our online training and to virtualize that care. The biggest challenges we see right now with the launch are they're sort of -- as Wayde would say, they're champagne challenges in effect. Demand is so high that we're having trouble answering the phone as quickly as we normally would. So our service levels are not where we want them to be. We're not happy with that. It hasn't been a barrier to volume. I mean we're having terrific demand, terrific starts, but we're investing now in ramping capacity so that we can service questions. And one of the most frequent questions we get asked is actually about access. And so as we announced at the end of Q2, our access -- well, our covered lives are about 55% of covered lives in the market. And there's such a pent-up demand for Omnipod 5 that we're getting a lot of calls asking for help in getting their Omnipod 5 covered by their plan. And we treat those all. We want to white glove that and get patients on therapy. So that's driven a high volume of questions and then there's other questions. And so it's a good problem to have because demand is so high that we're at the edge of our capacity and our service levels [ as well ], and that's where we're investing right now is to get back in front of that. But otherwise, I don't think we've seen any barriers. Demand is terrific and adoption has been really, really strong.

What's the path to getting coverage at parity with DASH today? How long does that take? What are the -- from your end, is it more capacity constraint limitations almost in being able to multitask and work on multiple things? What's the biggest kind of...

Well, we have a coverage team. We have a field team that calls on payers, and we did a couple of things there. I'll just remind everybody that at the end of the quarter, we were at 55% covered lives, which is months ahead of where we were with DASH. And then we've priced Omnipod 5 basically at parity with DASH. And what -- the part of the intent of that was to streamline the contracting, so we could get forward coverage. And so that's still -- that's moving very, very quickly. And the team focuses on kind of the big blocks, the plans with the most covered lives. And so we've been working through those big blocks. I think it's gone really well. And it's now a matter of just working through the different -- sort of the different payers and the different plans and just securing coverage as we go. I think we'll continue to be well ahead of the timing on DASH. In fact, we're seeing that, and we won't announce a new number today, but we've had good progress on that front. And then the other thing that's really quite interesting is there's so much patient demand that patients have been pressing their plans to cover Omnipod 5, and that's noticeably moved the needle. We've seen that where a patient will call up their insurance provider and say, "Why can't I get coverage for this?" And that pressure has also moved coverage. And so I think we'll continue to see accelerated coverage. I don't know, Wayde, if you want to add to that.

Yes, I think you covered it really well, Jim. It's -- maybe just a bit of perspective is when we started out, obviously, we wouldn't turn on full market release with 10% or 20% covered lives because that would mean most people don't have coverage. We're not going to wait until we've got 90% coverage like DASH. So we know that when we launched with 55% coverage, about half the people don't have coverage yet. So we knew, our expectations were you have to work through this, as Jim just said. And so we've got people within our customer care and product support teams that are set up to help those people get coverage, and as Jim just said, whether it's working with their payers. But it's just -- we're only in a few weeks in here. It's very early days, and so we're working through that today. And as Jim said, the good news is demand is so high. We have so many people that want on the product. We're just having to work through with them how they get access and get them on the product. But as Jim just mentioned as well, we've got a lot of momentum building access for customers, and we're already seeing it move faster than DASH. Our expectation is that it would move faster than DASH. And again, we'll update it at the end of the quarter.

Okay. DASH, the areas where it's still going through DME, O5 is solely pharmacy. What is the path to shifting that portion of your business? Clearly, maybe that's not the near-term focus given the other areas of momentum. But what does that look like? And then also, have you seen any pricing pressure on DASH with O5 coming up?

We haven't seen any significant pricing pressure because of the way we price the product. And so -- and for us, as we move into pharmacy, we actually get a pricing premium because of the way those contracts work. And the shift into pharmacy is a natural thing because of OP5, because of Omnipod 5, the big demand for Omnipod 5. What's -- in the quarter, we announced the number, we're at roughly 65% of our new customer starts through the pharmacy channel, which is an increase. And I think we'll continue to see that increase as demand for Omnipod 5 increases. But you may want to elaborate a little more.

Yes. Yes. And just to clarify, about 65% of our volume is going through the pharmacy channel today, which is a good proxy, as Jim just highlighted, a good proxy for the number of new customer starts that are going through there. But yes, with about 2/3 of our volume going through the pharmacy channel today, we've seen it. I think part of your question, Cecilia, would be around we moved a lot of DASH customers into the pharmacy channel as a first step, and we saw quite a few people converting from the DME channel to the pharmacy. We do expect with Omnipod 5 that that will accelerate. And we're not really distinguishing between existing Podders that want to move to Omnipod 5 or new customers that want to get on Omnipod 5. And so both of them, actually we're seeing incredible demand in that area as well. In fact, all 3 areas. New customers, either coming through MDI or competitive switches, or from our existing Podder base, there's a lot of interest in Omnipod 5. So in the first few weeks here, all 3 of those areas are really putting a lot of pressure on our existing capabilities. And that's why after we've learned what the demand is here, we're investing more in those capabilities to ramp up and try to clear the call volume, as Jim just said.

With your expanded pediatric indication, too, as you think about just total pump penetration in adults, in pediatrics overall and then in the preschool cohort, specifically, where on a relative basis do you see O5 penetration, again, among -- if you look at just the total pump market going in those 3 segments on a relative basis?

We haven't talked publicly about penetration into different parts of the customer base in different demographics. But I will say that for pediatrics, Omnipod 5 is just an offer right in the sweet spot. We were so excited to see the FDA clearance on that just in the last few weeks because Omnipod 5, it's discrete, it's easy to wear, it's easy to use. And for me, as a new CEO, one of the most gratifying message we get all the time that frankly moves me every time we see it is, we'll get parents of young kids who have type 1 diabetes e-mailing us or calling us and saying, "Oh my gosh, this is the first time I've had a full night's sleep in 6 years since my child got diagnosed." And so the Omnipod 5 offering is right in the sweet spot for pediatrics. It's so easy for them to use, so easy for them to wear overnight, manages their lows overnight, which is a huge concern for parents. So it's -- we're tailor-made for that spot of the market, and the extension down to age 2 has been terrific for us.

And for CE Mark, is the idea to also have the same coverage in terms of age cohorts?

That's right. CE Mark will go down to age 2 as well.

Okay. As you think just longer term to potential integration with Libre 3, assuming they're able to remove that kind of indication, but how does that further open up the target patient population? Just the economic differences between the 2 CGMs, how do you think kind of your kind of view in the market and ability to access patients shifts with that?

Yes. Well, we feel quite good about our partnerships with both of our CGM partners, and we're continuing to work with both of them right now in real time to integrate into the next wave of products. Obviously, we need to complete the integration with Libre as a next step. The first general point I would make is that CGM really paves the road for us. Because to have Omnipod 5 on market, we need to have a CGM that we can connect with, so you can have the hybrid closed-loop system. And so it's terrific that they're out in front of us and driving awareness and driving adoption. And then obviously, it's no secret that the 2 companies are both well positioned globally, but they have different positions regionally. And so once we complete the Libre integration, it will open up a lot more of the European markets for us as well, much higher volume in European markets, larger TAM in Europe for us. But there's so much growth left with both partners and working and helping AID to penetrate markets that even where we are right now, we have a ton of growth. As we finish more integrations with them, it will just grow the TAM further. Do you want to clarify anything?

I think you got it, Jim. Yes, It sounds good.

Okay. In terms of OUS expansion, you talked about -- it sounds like a targeted kind of country-by-country approach. You're going to have to go through different stipulations for AID in each country. As we think, though, just longer term, as you work through that pathway, what is AID penetration in the U.S. versus some of your key OUS markets look like longer term? Is there -- as you think about just the value proposition in one market versus the other, the competitive landscape, which trends ahead of the other?

I'm sorry, what was the last part of that?

Which trends ahead of the other?

Which trends ahead of the other, well, the adoption of AID in the U.S. is stronger. And we don't yet have an offering for AID in Europe, obviously. There's -- I don't think there's any reason for kind of long term for the markets to outmatch each other. It's a question of just getting the technology out and getting it adopted. And there are -- each European market -- people tend to think in terms of Europe, but Europe is not an entity. As everybody in this room knows, each individual market has to have an offer that's tailored to it in terms of access and reimbursement and so on. So what we've said about growing ex U.S. is that there are 2 long poles in the tent for us. One is CE Mark, which we expect to get very soon. And the other is for Omnipod 5, for us to introduce AID into ex U.S. markets and into Europe, we need to complete our cloud infrastructure. And that cloud build-out is a key part of the Omnipod 5 offer, and it requires that we comport with all of the European regulations and then individual country regulations. So GDPR as a broad-brush stroke across Europe, but then there are certain things you have to do in France and then certain things you have to do for the hospital markets in the Nordics. So we're building that out. We think once we can launch AID, we should see very, very strong growth for the whole Omnipod family of products. DASH is doing very well and competing right now on its form factor advantages. And once we launch Omnipod 5, we expect to accelerate that. I think long-term adoption should be very broad, and we should see penetration that -- my anticipation would be you'd see roughly equal penetration at some point in the future, but we have to get into Europe first with AID. And again, I can't see you, so if you want to comment, just dive in.

No, I think that's it. There is some differentiation between type 1 in the U.S., obviously, as Jim said, more penetrated, but in particular, type 2s, where we do have reimbursement in the U.S. And so type 2 has been growing very well for us. We think we've got a nice differentiated leadership position in type 2s in the U.S. with DASH today, and then we're working on getting a label for Omnipod 5 as well. Outside the U.S., type 2 is trailing. As Jim just said, over time, it should end up ending up about the same penetration, but we think it's going to take a good amount of time more outside the U.S. for the type 2 market to develop.

As you think about just the TAM expansion into geographies you're not currently in, how much of a near-term priority is that as you're focused on rolling out O5? And if so, if that is the case, do you lead with DASH and then look to ultimately bring in O5?

That's a great question. We have DASH on market right now in all of the markets we're in, and that's our lead global product and it's a fantastic offer. So we intend to continue to drive growth with DASH, and I think we're growing well in almost all those markets. And so DASH is a clear play for us ex U.S. And in U.S., it continues to be a very popular product. And of course, it has an IFU for type 2, as Wayde was just saying. So we have the indication for type 2 with DASH in the U.S. We will then -- so we'll lead with DASH, and then we'll introduce Omnipod 5 on top of it. And one of the things we're working on right now is to make sure that we're going to -- we can establish the evidence we need and the reimbursement we need to make sure that we're capturing the value that the Omnipod 5 offer brings. And because Omnipod 5 is actually -- it's a different offer, it's a novel offer compared to a tube pump. And so in some cases, reimbursement doesn't match our offer very well. And so we're working on that and we'll develop those markets. And that's one of the reasons we want to sequence our European launches because we want to make sure that we're launching in the right way and we're launching in a way that allows us to set ourselves up for success and for midterm, long-term success as well as just short-term success with the offering. So we will lead with DASH and then bring Omnipod 5 in on top.

And new markets that you're not currently in?

New markets, it will be market-by-market. We'll have to see what the -- in some new markets, we may be able to go straight to Omnipod 5. And Omnipod 5 is effectively the offer that Insulet was launched to create, right? It's a wearable, disposable, tubeless AID system that delivers fantastic clinical results. And so if we can lead with Omnipod 5, and that makes sense in terms of the context of the market, in terms of ability for the market to pay, in terms of regulatory, then we would lead with that product. But in some cases, we may enter with DASH first to -- as we have in most of those markets, enter with DASH first to get into market because maybe the reimbursement pathway is a little simpler or whatever. But it will be a market-by-market choice.

Do you think longer term, you could see somewhat of a tiered offering as you think about just the options you're providing patients with the 2 different modalities?

I think all those options are on the table. You could certainly see a 2-tiered offering because Omnipod 5 creates more value than DASH does, net-net. And so we may end up in markets where we have maybe those 2 different reimbursement categories. It's quite different market-by-market. You might end up with 2 different reimbursement categories. You might end up with a way where you have kind of the DASH offering and then the premium Omnipod 5 offering that are priced differently. I could see that in different markets. But again, I think it will be geography by geography.

Okay. Turning back to the U.S. As you think about just your type 1, type 2 mix, O5, it's going to skew that toward type 1. But what have you seen from the type 2 patient population? You don't have the label yet, but just speaking about the easier pathway to go from DASH, if you're already on DASH to ultimately get O5, has that augmented your type 2 patient -- new patient type 2 thing?

Well, we can't promote -- as you know, we don't have the label, so we can't promote Omnipod 5 for patients with type 2 diabetes. Physicians can write that script if they want to. And there's no distinction in reimbursement. We haven't -- it's really early for us to talk about any trends that we're seeing with -- because on our onboarding process, there's an option to tell us what -- which type of condition you're with. But not everybody tells us that, and it's very, very early days, and we're certainly not promoting off-label. If I go back to DASH, DASH has been so successful because it's so discrete, unintrusive and works really, really well for patients with type 2 diabetes. And in fact, many patients with type 2 diabetes are using DASH just as a basal product, right? So we know that there's an interesting need for that. Our growth with type 2 patients continues to be strong year-over-year. But because Omnipod 5 is growing so rapidly and because we consider that a type 1, it's a type 1 label offer, that's why you'll see the percentage of our mix of type 2 patients go down because the denominator is getting bigger. So we feel pretty comfortable that, first, we're going to continue to service type 2 patients very effectively with the DASH offering. We'll see what physicians decide to do in terms of what -- we're not going to promote it, but we'll have a sense of the extent to which Omnipod 5 has become a therapy for type 2 patients. And in the meantime, we're in conversations with the FDA about a potential pivotal trial to get the label, the type 2 label for Omnipod 5. We saw with our feasibility study, which was data we published in Spain in ATTD, the Omnipod 5 is a fantastic offering for people with type 2 diabetes. It dramatically improves time in range. And interestingly, it lowers total insulin use, which could be a real benefit, in particular, to U.S. payers. And so we feel very confident that Omnipod 5 will be a successful therapy, but we're not promoting it.

Okay. Understood. Then on the pivotal design, I know that's still in the works. How would you look -- at least at this point versus the type 1, kind of any major shift? Can we expect something similar? How would you just frame at a high level?

Well, I think Omnipod 5 will be a very, very popular therapy for patients with type 2 diabetes once we have a label and we can promote it. We haven't put out any time lines on that. So we're still in conversation. And when we have clarity on that, we'll talk more with investors about what the timing would look like.

Okay. As you think to post label for a type 2 ability to move out, what's the lowest hanging fruit as you think about driving pump penetration in type 2 patients higher, now having an AID system that can go through the pharmacy? Where is kind of the incremental add that really pushes you forward into kind of a certain patient subset maybe?

Do you want to pick up on that?

Sure. Yes. I mean obviously, those that are insulin-intensive subset of the type 2s that are on Dexcom G6 CGM, I mean that's clearly the target market because that's what we're on label for use. As Jim mentioned, there's people that use it for just basal as well. But I think that's the major target market. And if we think back about our strategy and how we got here to this exciting chapter, there were really 3 things that we wanted to do. One was to lower costs. And we've done that in the pharmacy channel with a really low co-pay where almost all of our customers pay less than $50, many pay $0 and the average is far less than $50. So we did that. We also want to simplify the product. As Jim just said, we feel we've got the most simple product, easy-to-use, most discrete product. And then last thing was awareness. And many customers, type 1 and in particular, type 2, don't have -- our research shows, don't have an understanding of the options available to them. So I think what we'll have to do is drive awareness with direct-to-consumer type campaigns. And so that's where we think there is a lot of the opportunity to your question, Cecilia, is once we start to drive awareness for those people who are already on CGM, that's a real opportunity for us. The CGM companies have created a wave of growth for us to build into here.

Okay. I know we're almost out of time. Last question, though. You talked about a randomized 200 patients trial, O5 versus pumps. As you think about just leveraging that, both international but then in the U.S., kind of what's the strategy there? And then from a time line standpoint, how should we think about just kind of the impact, when we could see the data and ultimately translate into market impact?

Yes. We're just enrolling that trial. So the reason for that trial is we want to continue to build evidence for our therapies. And that's a U.S. and European-based trial that we've launched. And what it will help us to do is, as we were talking about before, Cecilia, is the more evidence we can have as we develop the European markets, the better off we'll be. And so that's why it straddles geographies. We've started enrollment in the U.S. We'll start enrollment for that trial in Europe very shortly. And it should complete relative -- I don't know if we've announced the time line on that data, but when we have it, we'll certainly want to publish it. And that will go into kind of our momentum, if you will, of evidence that we have to continue to develop markets, both in the U.S., but especially, I think, for that trial, ex U.S., so we can demonstrate to government payers and other European entities that the evidence that they need to be able to provide the reimbursement that we think is appropriate for Omnipod 5.

Okay. With that, I think we are out of time. But thank you, Jim, Wayde, both, for being here today.

Yes. Thank you, Cecilia. Thank you.

Thanks, Cecilia.