Insulet Corporation (PODD) Earnings Call Transcript & Summary

Great. Good morning, everyone. Thank you for joining us for the 47th NASDAQ Conference in association with Morgan Stanley. I'm Cecilia Furlong, a Medical Device Analyst here at Morgan Stanley. It's my pleasure to have Insulet with us, CEO, Jim Hollingshead; and then also Deb Gordon, IR. Thank you both for being here with us today.

Thanks, Cecilia. It's great to be here. And is this still morning or good afternoon, everybody. It's nice to see you all here. Let me just start with a couple of comments about Insulet for those of you who may not know us. Our mission is to massively simplify the lives for people with diabetes. And we're known for the Omnipod product platform. The Omnipod is a wearable disposable tubeless insulin delivery system. We're really excited that we've just launched the fifth generation of that product, which also includes an automated insulin delivery algorithm is a product called the Omnipod 5. We just launched that product in the U.S. and it's growing really dramatically. For those of you know, diabetes is a worldwide epidemic, both type 1 and type 2, growing in incidence and prevalence. We think we have a massive runway in front of us with our technologies, and we're really excited to be here today and to talk with you all.

Okay. I wanted to start just high level, frame how you think about your TAM, both across type 1, type 2 international pediatrics is a big part of your business. If you could frame that and then just also speak to high level, the competitive barriers to scaling a pump patch business. We've heard competitors out there talking about it. But really what is the biggest competitive there that you have or competitive moat associated with your business?

Sure. Our TAM -- TAMs are different for people with type 1 and people with type 2 diabetes. The TAM in the U.S. where people with type 1 diabetes is about 1.7 million, 1.8 million people it's about 50% more than that again across Europe and globally bigger again. Type 2 is actually a much larger potential TAM. Millions of people have type 2 diabetes worldwide epidemic. And we are playing in both markets, and I can talk a little bit about that. But those are the very big TAMs, both underpenetrated. The big distinction between someone with type 1 diabetes and someone in type 2 diabetes is someone with type 1 diabetes as soon as they're diagnosed needs insulin every day to stay alive. And so right now, a type 1 diabetes represents the largest part of our business. People with type 2 diabetes have very different disease progression. And as they get diagnosed, they tend to be put on a therapy that would be sort of lifestyle, weight control, then they'll go to oral meds and then they go to some injectables and then they start to need insulin and become insulin-dependent or insulin-intensive people with type 2 diabetes over the course of their disease. We offer our Omnipod 5 offering, all of our Omnipod offerings are really initially designed to simplify life for people with type 1 diabetes. And really what we're trying to do is replace what's called MDI, or Multiple Daily Injections. And so those of you who may know, people with diabetes are typically sticking themselves with insulin multiple times a day. The Omnipod platform is a simple wearable patch pump that's designed to eliminate those injections. With the addition of AID or Automated Insulin Delivery, it uses an algorithm to dose you and keep your blood glucose in a defined range, so your time in range all day long. So it automates all the delivery completely eliminates the need for injection, self-injection of insulin. And working with the Dexcom and other manufacturers, Continuous Glucose Monitor, CGM, we now have an offering that's called a hybrid closed loop. So the Omnipod 5 takes a data read from the Dexcom G6. And with that is effectively almost an artificial pancreas, so an automated closed loop keeping the patient in range. The Omnipod 5, we went into limited market release early in '22. We went to a full market release in August. It's growing like mad. Talk a little bit about type 2, which I think is the second part of your question, our previous generation of product is called the Omnipod DASH. It's the same small form factor, tubeless wearable disposable does not have automated insulin delivery, but allows the patient to looking at their blood glucose, both first get a basal rate of insulin, so they get their daily needs as a base rate and then they can bolus themselves, which is before a meal, they can use the pod, they use a controller, and they give themselves a dose of insulin for meal time. That has an indication for use in the U.S. for people with type 2 diabetes. It's been extremely popular with people with type 2 diabetes because it simplifies their care and has been a very important part of our revenue in the U.S. And so we're the leaders in pump technology both for type 1 and type 2. And then I think the next -- what was the -- let me -- remind me of the third part of your question, Cecilia.

Just sort of the competitive that you have and underappreciated really about being able to build a patch pump business just the scale you have.

So we compete with companies that have what are called tubed pumps, chief among them Medtronic and then a company called Tandem. And those insulin pumps are about that size versus our patch pump, which is about that size. And they take an insertion set, so they have a cannula and a needle set that you inject into your skin. And so the first moat that we have is just the massive consumer preferred form factors. So our patch pump is a small thing. You can put it on your arm, you can put it on your abdomen, you wear it for 3 days, when it's out of insulin, you take it off and put on another one. It has an auto insertion set, which is a painless cannula insertion that's generally not felt by the patient. There's no need for tubes and wires that hang off of you. One of the big complaints about tubed pumps is people will get it stuck on a door knob or they have things like that, it's intrusive, you're wearing it maybe on your belt or maybe in your pocket. Ours is a small, very discrete wearable thing. So the form factor is a huge moat for us. The other big moats for us include things like we're in the pharmacy channel in the U.S. Our competitors sell through the durable medical equipment channel. So it's a different reimbursement model, and it's also very good on practical access for patients. So now Omnipod 5 is accessible in tens of thousands of retail pharmacies around the country. The other -- the financial moat for us as well because by being in the pharmacy channel and because we're a disposable wearable unit, there's no upfront outlay of capital. And that's really good for patients, and it's really good for payers. So if you're on a tubed pump, you typically have a co-pay of something around $1,000. A tube pump will have a first capital outlay cost of $4,000, $5,000 or $6,000 depending on the insurance company. The consumer will pay some percentage of that. So to start therapy on a tubed pump, you usually have a very high co-pay. That's not true of us. There's no big outlay for us. In fact, for a customer starting on our therapy, they will typically -- the way we've priced it and the way it's reimbursed, mostly they have -- the vast majority of our customers have a co-pay of less than $50 a month. Many of them pay 0 as a co-pay. And it's very much in line with the cost, the out-of-pocket costs associated with multiple daily injections, right? So it's not a financial costs are not a big barrier for most of our customers to start on therapy. From a payer point of view, you're laying out $4,000 or $5,000 of capital for a tubed pump and then you're hoping the patient is going to stay adherent. So that's a financial risk for the payer. There's no financial risk for a payer with us. In fact, we're bearing most of the short-term risk because we -- our pod is controlled by a controller, which is a lockdown phone. That comes as a part of a starter pack. And in the U.S. market, our largest market, we don't charge for that PDM. So we make up our revenue and our profit on the trailing revenue of the pods. So the payer face is no risk. We actually face for a short period of time, the initial financial risk of the therapy. And so much better for the patient economics, much better for payer economics. And then the last point I would make is we have a big moat around our technology. It's extremely difficult, we know from our own experience to develop that highly miniaturized patch pump. We're well protected on IP. We're very well protected on trade secret knowledge and the production of it. We make millions of these pods a year. And while we're very conscious that other players are trying to catch up with patch pump form factors, we think it's a big challenge. And of course, we're not stopping. We're constantly innovating as well. So we think we have really robust competitive moats around the form factor, the technology, the ease of use. And now with automated insulin delivery, we have what we think is the winning -- the best, most winning offer on the market.

Okay. Going to recent trends in the business and then talking about Omnipod 5, 3Q, strong performance and would love to hear you speak to also just some of the initial contributions. You talked about $16 million from initial O5 starts and a benefit in 3Q. But you also talked about your historic mix, it's been 80-20 split between more patients are coming on to Omnipod and 80% from MDI you saw that shift in 3Q. How durable? How sustainable is that do you think? And then as we think about 4Q and the headwinds, tailwinds, including how we think about the $16 million benefit in 3Q?

So let me start with the demand has been terrific for Omnipod 5, and we're sourcing patients from basically all different sources of patients. So to make that clear, our target market is really multiple daily injection users. We're trying to simplify that routine for people with diabetes. And historically, what Cecilia is referring to is historically, about 80% of our new customer starts come from MDI users, and the other 20% come from competitor tubed pumps. What we saw in Q3 was demand high across the board. So we saw very high demand from MDI users. We saw very high demand from our own previous generation product users who wanted to upgrade and switch. And we saw very high demand from our 2 tube pump competitors. So the mix went from 80% MDI, 20% switch to 60% MDI, 40% competitive switch. But the demand was very, very high. And so if you took just notionally, the math doesn't quite work this way, but just as an illustration, if you took that 40% of conversion and cut it in half, so you went back to an 80-20, we still would have had our highest ever new customer starts on that basis. So Omnipod 5 out of the gate is growing tremendously. And in fact, in Q3, we announced in the U.S., we had 42% growth, which is a giant growth number and is our best growth number in more than a decade. So the demand for Omnipod 5 has been just fantastic. And we're so excited because the feedback we get from patients is so positive, and we know we're changing a lot of lives. It's been great. The $16 million -- and Omnipod 5 is only available through the pharmacy. So our previous generations of product, the Omnipod Classic, the Omnipod DASH were both available through DME. Omnipod DASH, which is our -- just before Omnipod 5 our most recent product launch, we also then put into pharmacy. We were able to get Part D and get into pharmacy, and that was a big and growing part of our business. What's happened with Omnipod 5 is it's only available through pharmacy. And that's a new model for us and what -- and the $16 million, there's sort of an upside. And the 2 upsides we saw in there that we're calling out our first, what we're finding is when patients get a prescription for Omnipod 5, we're finding the initial setup, they're getting 2 scripts because they're getting a starter pack that comes with the phone controller. And then they're getting their first full prescription to go with that for the next. And because that's a new dynamic, we used to only do the PDM directly. We didn't do it through pharmacy with DASH. So that's a new dynamic for us, and it's hard for us to trend out how that will play. Will people will people get those 2 prescriptions and then will they take another prescription in the next month? Or will they wait 2 months because they now have 21 pods? So we're calling that out because we're not sure how that trends out. But it definitely gets to steady state at some point, right? The other onetime thing we see as a benefit on revenue there in that $16 million is inventory is going out into retail pharmacy. So we sell into distributors and then distributors sell into retail pharmacy. Some retail pharmacists are holding stock, some are not. And it's very difficult for us to know how that plays. I kind of see it as like a fountain with little ponds beneath it. So we fill up the distributors and then they fill up somebody and then they fill up a retail channel. And we're not sure how -- that will also obviously get to steady state as all those inventory points build out, but it's hard for us to trend that. So we saw kind of what we're thinking of as a onetime benefit of $16 million of revenue in the quarter. It's hard to know whether it will be in Q4, but eventually, it will get to steady state, if that makes sense.

It does. And if you could talk to about just the onboarding pathway for patients. DASH patients who have been on your pods before versus patient, either MDI coming from a competitive pump, how those differ if you've had any kind of limitations, especially as you think about onboarding new patients? And then as you think about your DASH patients today, where do you think you are in converting them? And how long is that time cycle, do you think?

Yes. It's a really good question. So the beauty of Omnipod 5 is that it's very easy to onboard a patient and we've put in place a number of tools to be able to do that virtually. Because it's a cloud-connected device, that's one of the new and novel things about Omnipod 5 is that it has a -- it actually has the ability to communicate in the cloud. And so what we can do is we can do online training for patients to onboard themselves under the product. However, different types of patients have different types of needs. . And so in some cases, we're still training patients in the physician's office. In some cases, it's sort of a hybrid situation. Some physicians' offices require that they want to set up the patient as opposed to having us do it in the cloud. And so we've created all of those pathways for Omnipod 5, which is really ease transition, specific to different types of patients. So somebody coming from DASH from our previous product. What we're finding is that they're actually having a pretty easy time. They're very familiar with the form factor. They're very familiar with self-insertion. They're very familiar with the idea of a controller. And so they're typically going through a virtual pathway. We're also seeing really big success with MDI patients setting up through the virtual pathway. Where we have -- where we've learned that we need to -- we've upgraded the way we're talking both to physicians and patients is we have a much higher volume of patients coming from our competitor tube pumps. And they have a different expectation, both the physicians and the patients. So it's -- when you get set up on a tubed pump, there's typically more training required and there's typically a longer period to have that patient get to time and range. They tend to be a lot of sort of setting the dial, resetting the dose, talking to the physician's office. That's not really true with Omnipod 5. With Omnipod 5, it works right out of the box. If you put the device on, it will automatically working with the Dexcom G6 sensor. It will automatically be dosing you with insulin to keep your time and range. But then what it does is it goes through a learning period where the care is personalized by the pod over a series of 2 or 3 or 4 pods. So over a few days, each pod lasts about 3 days. So over a series of 2 or 3 or 4 pods, the algorithm is learning your total daily use of insulin and how you respond to insulin dosing, and it's tightening that range up over time. What we found is that patients coming from another tube pump, initially, obviously, we've set that algorithm at its outset to be a little bit conservative on insulin dosing because overdosing insulin is a bigger risk than underdosing insulin, right? So we've set it to be a little bit conservative in insulin dosing. And so somebody that's been well controlled on another AID algorithm in those first few days might think that they'll see that they're running probably a little bit higher in blood glucose than they were. And then what happens is they think they need to be fiddling with it, adjusting it or whatever. In fact, they don't. What we found is that if they just let go 2 or 3 pods, let the algorithm learn, they get very, very tightly controlled with no effort. Similar dynamic with physicians. So physicians are used to adjusting knobs and so on. And what we've seen is that the physicians out there have all now gone through this learning curve and they all understand. I just did a field ride in Southern California for a day. And I was talking to a number of physicians as I went through my -- as I rode with my sales rep. And virtually, every physician I talked to said, okay, at the beginning, we had trouble figuring out how to make sure we were -- then we realized now we know. Now we have experience with it. So I think we'll see that learning curve play out in the market. So there'll be less noise around how much -- why is it running a little high in the first couple of days and what they're doing. The thing is it's working so well that nobody is out of range. Is just they might be running a little bit high in range and then the pod adjusts itself. And so we've made -- we're making a lot of those adjustments as we're talking to physicians. We put out new marketing collateral in the field is talking differently with him. And so far, I mean, the demand shows is just going incredibly well, and we have thousands of new customers starting on the product very successfully.

And then how do you think about just DASH in the conversion time frame? And where do you think you are at this point?

Yes. It's we're not sure in terms of actual percentage of conversion. But I think that the DASH conversions have been a little higher than we forecast out of the gate. And based upon what we're seeing, I think we'll probably continue to see those conversions through the bulk of 2023.

Okay. And I wanted to ask you, you put out an 8-K talking about -- and you talked about it on the 3Q call that some issues you're seeing with the controller and specifically not to do with the pod that the controller itself and -- can you just update us if you have updates? And then as we think about just kind of the spectrum of potential outcomes, how you're thinking about that spectrum?

Yes. So we actually have announced 2 medical device corrections, 1 on DASH and 1 on Omnipod 5. And none of it has anything to do with the pods. The device correction on DASH had to do with batteries. So the battery in the DASH controller was -- we've had an issue with a small percentage of not keeping their charge very well. And sometimes when they don't keep their charge, they expand. And when they expand, it sort of opens the case and the sort of -- so we started to see that trend. I think we announced this in Q2, we've done a medical device correction. We've already reported we have accrued $37 million for that correction. We know the root cause. We've put out a field safety notification alerting customers to it. We've had -- we're having a response cycle to that. And it's a software upgrade required in the PDM itself, which we're in the process of doing. And once that's complete, we will send new PDMs to everybody who's on a DASH product. So they've got new PDMs. We've had -- there are no patient injuries. In fact, I should say, patient safety is our #1 priority, right? And so we're focusing on making sure we get that fixed. We haven't had any patient injuries. It's just a matter of the PDM not keeping this charge and then sometimes having the battery fail in a more physical way. The one we -- the field safety notification we just did on Omnipod 5 has to do with the marriage between the charging cable and that PDM. They're totally different PDMs. So -- I'm sorry, PDM, for those of you who don't know, is stands for Personal Diabetes Manager, it's basically a lockdown phone. So that's a term of art for us, right? It's the controller. It's the lockdown phone controller. So the Omnipod 5 one is in some very rare instances when the charger cable and the phone interact in a certain way if they get what we've discovered, we now know the root cause of this. But what we discovered is certain things have to happen, you need to have some sort of obstruction between the cable and the PDM. And in certain instances when that happens, the PDM can overheat to an extent where it will actually create a little bit of melting on the plastic on the cable. And so that's when we actually found that ourselves as we were reviewing all the quality on the DASH battery issue. We've worked with the FDA, again, no patient injuries. We now know the root cause of that. We've issued an FSN and the final steps of that, we're still working on with the FDA. But we don't anticipate anything further than simply doing a field safety notification and then we'll see. We haven't yet determined what we'll have to do with , but we'll we know how to fix those -- that issue as well. We have the root cause.

Okay. Just broadly thinking about macro dynamics, inflationary supply chain, can you speak to your approach, how you've handled that as you think about, especially ramping O5 supply? And then what you've said or how you're thinking about the impact as we think about the margin expansion story for '23 specifically?

Yes, sure. Supply chain, everybody has faced disruptions. I think our team has done a really, really good job of acquiring components and managing supply chain forward even beginning with COVID-19. And so for us, we think about the patient situation, once you're on a pod, you need your pods, and we know that. It's not a onetime sale. When we get a patient on a pod, they need a recurring stream of pods. So the way we've managed that is we have very close relationships with our suppliers. I think our supply team has done a great job of acquiring forward. And that will show up -- you'll see that in our working capital, right? So we're carrying more component inventory and this started during COVID-19 and continues we're carrying more component inventory than we would have normally. We would normally be running more of a just-in-time kind of supply chain issue. Given the growth of Omnipod 5, we know we need more supply. And the scarcity -- I think everybody knows, everybody is -- every company probably at the conference that has electronic components is facing the constrained supply of semiconductors in particular. So we've been working very closely with our chip suppliers. We ask a lot of them. And we're working with them now because as we see the growth trajectory in Omnipod 5, we're negotiating for further supply we feel pretty confident where we are right now, especially for '23. And then as we need -- we have more needs, we'll be negotiating contracts forward for that. So I think we're in a very solid position on supply.

Okay. I wanted to ask on type 2. Still don't have an indication for Omnipod 5 yet. You've talked about running a trial. You also just talked about a basal-only patch getting that patient population. But as you think about one, can you just walk through the time lines for both of those, how you think about them hitting the model. But then two, just going back to the unique form factor, pharmacy access. How do you think about just your ability to drive pump penetration higher in that patient population and really remove some of the barriers and pushbacks from the patient side when they initially have to transition to insulin?

Yes, sure. Let's start with Omnipod 5, and then we're back to basal, right? So the type 2 patient, we'll do lifestyle, weight management, oral meds and so on. And when by the time they end up insulin-dependent. They will be doing a basal rate and a bolus. Now what we -- and that's what the DASH indication for use is right now. So we're now easily the market leader in pumps for type 2. People have type 2 diabetes with our DASH product. . Omnipod 5 is the automated version of that. We've done a feasibility trial, and we reported those results in Barcelona at ATTD, fantastic results for people with type 2 diabetes significant improvement in time and range and actually, interestingly, significantly reduced use of insulin, which is terrific, both for the patient and also for payers in the U.S. in particular. We're working right now with the FDA, and we intend to launch a pivotal trial that would get us the indication for use for Omnipod 5 for people with type 2 diabetes in the U.S. during '20. Well, we will launch the study in 2023, and then we'll have to see where the study goes and then file and do all those things. But it's our intention to get the indication for use. We know we're getting off-label usage of Omnipod 5 for people in diabetes right now, so physicians can write the prescription. We can't promote because we don't have an indication for use. But that's a strong intent for us and we think Omnipod 5 will be a fantastic therapy model and technology for patients with type 2 diabetes. Omnipod -- the basal-only pod is very similar form factor, basically identical physical form factor but the intent of that product is to move upstream in the patient's progression. So when they're just starting insulin, they need a daily basal rate of insulin. And that pod will be much, much simpler. It won't require a controller, and it will just come with a set dose. And so there are sort of -- there are basic -- there's sort of a small number of set doses for insulin on a basal rate, so many units per day. And so we'll be able to have those pods be automatically programmed to -- you put it on and it gives you your basal dose as a trickle over the course of the day every day. And we think the benefits of that, we think it's very disruptive. It's a new world kind of offer. We think the benefits are around driving up adherence for people who don't remember to take their basal rate every day and also terrific for people that don't like needles. One of the barriers for people going on insulin is they just really don't like the idea of injecting themselves. And the pod is so simple to use and so painless to use for most people that we think what it will allow is for people who have that beginning need for insulin to get on therapy earlier and drive up their adherence. And then what we hope to do is show that, that improves outcomes. And so that will go way upstream. So then we'll have offerings with the pod that go through all of that insulin progression for people with type 2. You can get a basal rate, you can do basal bullish with DASH. Then we'll have the label for Omnipod 5. And because people will be familiar with the pod technology earlier in their progression to insulin dependency, what we picture is eventually when a patient progresses and they need more insulin, that can easily go to DASH. Actually probably by then, we'll have the label for Omnipod 5 and they will easily just transition to Omnipod 5. So it'll be better care for them, simple care when then easy transition for patients into our technology over the course of their disease progression.

Where do you see pump penetration in type 2 going over time? What -- just based on today versus longer term and really your share, how you think about the patch pump as a unique form factor for that patient population?

We think penetration can be very high in type 2, just like it is in type 1. And we think that our patch pump is so much more convenient, so much easier to use through the pharmacy channel, pay-as-you-go economics. Right now, pump penetration in type 2 diabetes is tiny. It's low single digits. And it's a massive unaddressed need and therefore, a massive total addressable market. We think the patch pump form factor is so much easier for people to use who have type 2 diabetes, that we have a really clear winning position in that market. Penetration right now for pumps in people with type 1 is in the 30s, we think that will go at least into the 60s and penetration in type 2 is so much earlier in the stage that we just -- we think there's a very, very large addressable market. And I just think the patch pump form factor with all the other conveniences around Omnipod 5 is going to be the winning offer in that market. I think it's people with type 2 diabetes by the time they're insulin-dependent have so many more things going on in their lives. They have so many other comorbidities and things they're trying to manage that a tubed pump in particular, is just so much work. And we think an automated patch pump that you just put on every 3 days is going to be a very, very convenient and winning offer for that market.

I know we're almost out of time, but I did want to talk about international briefly. You do have CE Mark for O5. You've talked about starting to roll that out in mid- '23. What are the biggest barriers? How do you think about just going on a country-by-country basis? And then you also are running an RCT and talk about just how that plays into your reimbursement strategy and your ability to get premium reimbursement pricing?

Sure. Our intent is to launch Omnipod 5 in European markets starting in the middle of '23 and then cascading through those markets through '24. We have CE Mark, which is a great milestone. There were 2 things we needed to have ready for Omnipod 5 in Europe. One was CE Mark, which we now have done. We weren't sure which was going to be the longest pole in the tent. We got CE Mark in September. Now what we're doing is making sure that our data privacy, security and our cloud infrastructure comports with not just CE rules, but with each country's rules. It's a cloud-to-cloud offering, which is a huge moat because you can -- the physician gets to see the data in the cloud, we can do over-the-air upgrades in the future and things like that. So that's a huge moat for us, and we're investing to get it right. And that we're working on as fast as we can, obviously, since we're going to launch in the middle of '23, we'll be ready for at least 1 country in the middle of '23. In terms of the RCT very quickly, and the red clock is flashing at. So the randomized controlled trial that we launched recently for Omnipod 5 is, Omnipod 5 against standard of care, which is a nonautomated insulin delivery pump with the CGM. And the purpose of that trial, we don't need it to get clearance anywhere. The purpose of that trial is to build our clinical evidence so that we can go to state payers and say, this is more valuable than the standard of care. And then it puts us in a position to continue to try to argue for reimbursement that better matches the value we create. And you'll see us continue to try to drive more evidence into the market so we can prove the case of the value that we deliver both to patients, but to payers.

Great. With that, I do think we are out of time. Thank you so much for being here. Thank you.

Thank you, Cecilia. Thank you, everybody. No time left, no time for questions, sorry.