Insulet Corporation (PODD) Earnings Call Transcript & Summary

All righty. Thank you very much. It's [ Patrick ] on the U.S. medtech team here. And very excited to have Jim and Wayde, CEO and CFO of PODD, over here. And it's going to be a really interesting discussion, I think. Disclosures, morganstanley.com/researchdisclosures, very exciting website. I expect to see all of you there. Reach out to your sales reps if you have any other questions. And so with that, let's kick it off. I think you want to do some opening remarks, right?

Yes. Patrick, thank you very much, and thanks, everybody, for joining us today. It's great to have you all here. I'll just start with a couple of comments. And first one is our business has fantastic momentum. We're coming off of a fantastic Q2 with record new customer starts, record revenue. We grew 32% year-over-year. And it's our fourth straight quarter of growth in the U.S. that starts with a 4. So we've had 4 straight quarters of U.S. growth at 40%-plus, which is really, really amazing. That momentum continues. We're -- business is in great shape. We continue to penetrate the type 1 market. We've had terrific results in type 2, and you may have some questions about that. But we had record type 2 patient starts in Q2 in the U.S. as well. Very excited that we've launched Omnipod 5 in the U.K. and now just recently in Germany, as we said we would. We intend to continue to roll out Omnipod 5 into our European markets next year. And we have a lot of innovation coming. So we've filed for our iOS app with the FDA. That's in the hands of the FDA. We continue to make great progress on integrating both with the Dexcom G7 and with the Libre family of sensors. And we are in pilot now with Omnipod GO, which is our basal-only Pod intended to go into the PCP channel and serve people who have basal needs, basal insulin needs in the type 2 space. So terrific momentum, great results and great road map coming.

I mean, it's a great place to start, maybe Omnipod 5. I guess, instead of starting with like the numbers and things, what are you hearing back from the Podders in terms of like their feedback on the product?

We hear fantastic things from Podders. And I'll tell you, it's hard for me to talk about, honestly, without getting choked up because we get videos from families and we get testimonials from people. And our most typical thing to hear from a patient who's gone on Omnipod 5 is it's changed their lives. And it's really overwhelming. And we think it's a great privilege to be able to have that kind of impact on people's lives. And the other thing that we hear from physicians in the market is that, when we launched Omnipod 5, I think most of the people in the room will remember that we had such incredible growth out of the gate. And we had sort of -- basically sort of -- we had rivets popping, and this is Wayde's phrase. We've had rivets popping in things like product support and so on. And as the product got adopted, what we found was, with people who were coming off of a competitive pump, the doctors sometimes didn't -- wasn't much familiarized with how to adjust our pump. The doctors is through that learning curve. And I was just on a rep ride in the Chicago area, visiting with a practice, it's a big [ endo-pedic ] practice in the Chicago area. And the physician told me that she doesn't really write now for anything but Omnipod 5 with her patients. She has a number of people on another competitive pump. She's often switching them because Omnipod 5 is so easy to use. And I said, "Well, why are you doing that?" And she said, "Because Omnipod 5 -- people on Omnipod 5 just do better." And I tried to kind of dig into that a little bit. She just said, "They just do better on Omnipod 5." And so the learning curve, the market has been through the learning curve, we're getting great feedback from our health care practitioner partners, and patient feedback is overwhelmingly positive.

Should we expect similar pretty aggressive adoption curve through the rest of this year? How about next year?

Well, we've had terrific adoption and great new customer starts, and we raised guidance in the second half. I'll just turn to Wayde to talk about that.

Yes. So our guidance, as Jim just mentioned, we raised quite a bit in the second half. And so I think we -- at the high end of guidance, Patrick, we would assume continued momentum, really strong new customer starts. Given the strength of our model, it's an annuity model, which makes it a very durable model. The revenue growth rate is often a function of the previous 4 quarters. And so as long as we continue to put up strong new customer start growth, and as Jim just said, we've got great momentum into the second half, that we expect to be certainly performing near or at record levels of new customer starts through the second half, at the high end of our guidance.

And then you saw a little bit of a step-up in conversions from competitive pumps. How should we think about the ratio of that versus MDI going forward? And I know it doesn't matter, but like what is the difference of onboarding a patient between the 2? Is there like any differences from your business perspective there?

So when we launched Omnipod 5 just over a year ago, we had more competitive conversion than we anticipated. And in fact, all sources of customers for Omnipod 5 operate at a level that were a bit higher, either at what we expected or slightly higher than we expected. And so that first quarter of launch with Omnipod 5, we got to a competitive conversion number of 40% of our patients, of our new customer starts. And that percentage has come down really about 5% as a percent of our new customers starts each quarter. But the number has stayed about the same. The actual number of patients converting off of competitive pumps has stayed about the same for us. And the reason the percentage changes, obviously, is because we're bringing so many more customers off of MDI into Omnipod 5 therapy. And so that's the ratio. We see that as pretty steady. We think the Omnipod 5 experience is so strong, we'll continue to get competitive conversions. The difference is there's no real difference in go-to-market or selling motion or anything like that. The difference has to do with training and patient expectations. And so what we see is that a customer coming on to Omnipod 5 out of MDI, very seamless, very simple onboarding, very few questions. And then for a customer that is coming off of a more complicated tubed pump product. And they've spent -- typically, they spent 2 or 3 weeks getting their tubed product, when they first went on it, dialed into a level of control. And the way you do that is you play with basal rates and you dial some things and the physicians dial things. With Omnipod 5, you don't have to do that work. But people coming from a very high level of control off of a competitor pump, with Omnipod 5 out of the gate, you tend to run a little bit high because the real mistake you can make with insulin therapy is overdosing people. So the Pod is designed to start a little bit high and learn the patient's response to insulin. And over the first 2 or 3 pods, it will dial the patient into range. You don't need to do anything with it. It will just do that. It will learn the patient's response to insulin and adjust accordingly. So at the initial launch, a patient might run a little high, might go to the physician and say, "I'm running a little high." The physicians who were less familiar with the product at that point might be trying to dial it. So it's that training difference. But the training difference is a benefit for us. First, because the physicians are now through the learning curve and physicians now understand that they can tell their patient, "Listen, it's fine. We're not going to dial anything. The Pod will learn you." And the other thing is the burden of training with the Omnipod 5 is much lower. So I think one of our competitors' labels has 10 hours of training. For us, training is about an hour, 1.5 hours and can be done virtually. So it's a huge adoption curve advantage for us. And we'll continue to push that advantage because our whole goal is to just reduce the burden of living with diabetes and really streamline the experience for people living with the therapy.

I mean, you've taken big strides, but I'd still say we're pretty early days in terms of connectivity, whether it's a CGM or over the phone. How should we think about the adoption curve? At some stage, Libre will be connected and like the product becomes more of a complete closed-loop solution in a ways. How should we think about the adoption curves and go through that connectivity cycle?

We think there's pent-up demand in all the populations that we can reach with connected solution. We saw that out of the gate, obviously, and we've seen that for the last year-plus with Omnipod 5. Our integration efforts are going really well. We're working very hard with Dexcom on the G7 integration. We're also working very hard with Abbott on the Libre family of -- integration. And you've got -- G7 is adopting quickly, and we're very keen to get on that product in our market with that sensor. And then Libre, obviously, is a whole new family of sensors for us to connect to. We're very bullish on getting all those. What we want to deliver is sensor of choice across all the iCGM's, CGMs in the market. And we're very close and getting closer on those integrations. We haven't provided timing guidance. I will say that we've launched the clinical trial in Europe with the Libre 2 sensor. So you can have a sense that to be putting patients in the trial, we have to have a working integration. There's still some steps to be made to make that a commercializable integration, but we're very prolonged on that front. And I think we should expect to see adoption across the Libre -- with Libre users that's very strong.

And then not to beat a dead horse, but inevitably, the GLP-1 discussion kind of comes up. I guess there's kind of 2 components to it, one, there seems, perhaps from my perspective, some confusion about type 1 diabetes and how it actually works. I think that article in the New England Journal of Medicine kind of created some confusion to some investors. So maybe level-setting that. But then also type 2 and the kind of time horizon we're talking about there.

Yes. So I'll take them in turn, Patrick. The type 1 diabetes is a totally different disease from type 2. I think most of the people in the room know that. But just to level-set, as you say. Type 1 diabetes is an autoimmune disease. Your immune system starts to attack the beta cells in your pancreas, and you lose the ability to produce insulin. And those patients always end up needing insulin, period, end of sentence. The New England Journal study was 10 patients, no control arm. And what it showed was results that were very, very similar to what is well known in practice as the honeymoon period. People that get diagnosed, especially adult onset type 1 diabetes, people present acutely because they don't know that they might have a risk for diabetes. They start to have symptoms that are flu-like symptoms. They come -- they typically come in a hospital, the ER or a doctor's office, and that's where they discover they have type 1 diabetes. Their blood glucose is way out of whack. They get treated with insulin, the blood glucose comes down. And then they might go several months before they need multiple daily injection therapy, but they always need multiple daily injection therapy. And so that study, to us, was -- and we double-checked our understanding with multiple doc, our KOLs, other KOLs. And that study, to us, is -- it's not really relevant for our market. For type 2, if I then back up and say, when we think about the impact of GLP-1s in the type 2 market, one other thing. We point out a couple of things. And the first one is the size of the unmet medical need with type 2 diabetes around the world is enormous. It's so big, it's almost hard to comprehend. If you take -- if you go to the -- actually, The Lancet put out a study. We have about more than 500 million people living around the world with type 2 diabetes right now. Lancet expects that to go to 1.5 billion like by 2050. So it's a massive unmet medical need, and there are hundreds of millions of people living with type 2 diabetes. If you just pivot to the U.S. market, choose a number, 150 million to 200 million people with obesity, 96 million people who are prediabetic, 30-some-odd million people who have diagnosed type 2 diabetes. By the time you're diagnosed with type 2 diabetes, you've lost about 50% of your beta cell function. So your beta cells are in decline because your pancreas is having to work overtime in type 2 diabetes. And then our end markets are the basal insulin therapy market, which in the U.S. right now is about 3 million or 4 million people; and the intensive insulin therapy market, which right now is about 2.5 million people. The GLP-1s have been indicated for type 2 diabetes for 18 years, widely adopted since 2010 with liraglutide. Ozempic has been in the type 2 diabetes market since 2017. And when you look at the long-term studies with liraglutide, there's good data on liraglutide in the market, what that drug does is it -- when somebody is put on that drug, their HbA1c comes down and then it goes back up. And so there's a degrading effect. So beta cell loss continues to progress in this disease. GLP-1s don't have a mechanism to reverse that. And since we've had long experience in the market now with GLP-1 class drugs, the delay to insulin is, in many ways, already baked in the cake. And the question then becomes, do the new agents have a different impact or do they have an incremental impact on the delayed insulin? But there's still that class of drug, the GLP-1s and the dual incretins, there's no mechanism to preserve or repair beta cells. So our view, we're very confident in, is that people still need insulin therapy. If there's a bit more delay to getting to that insulin therapy, they will all -- unfortunately for people living with type 2 diabetes, they will continue to slide down the slippery slope and they will end up in those end markets where they need insulin. Just the last point I'll make on that. We've been talking about this a lot, and probably everybody in the room has heard what we said about this. So -- and even Patrick may be tired of talking about GLP-1s, I don't know. But when you get to our end markets, we're just starting. So we made public our type 2 new customer start number for the quarter, which we don't usually do. In Q2, we had just over 5,000 customers come on to Pod Therapy with type 2 diabetes. It's an all-time record number for us. If you think about 5,000 in the quarter against 2.5 million people who need intensive therapy right now, just the math of the scale in any way, that's (sic) [ not ] a threat to our TAM.

I think within the type 2 community obviously, you've got GO. And I feel like expectations for that, the Street isn't really putting anything in. Maybe like help people understand the appeal of a basal-based pump and how that gets into this.

Yes. So people who need basal rate insulin often delay initiating therapy. And when you go and do the research, you discover that one of the main drivers of that is that they don't want to do injections. They don't want to do the needles, whether that's multiple daily injections or once-a-week injections. They often will just say, "No, I'm not doing it," because they don't want to do an injection. And the other thing we know about people who need basal insulin therapy is they tend to delay. So you want them on earlier when they do need insulin. But they often have trouble adhering to therapy, which is true of a lot of chronic disease. And so they might -- if they're on multiple dailies, they might skip their basal dose or forget to do it. If they're going to end up on once weekly, they have to remember every seventh day to take their shot. And so Omnipod GO is designed to overcome those 2 problems. The first thing is it's incredibly simple to use. There's no CGM connection. There's no personal diabetes manager or PBM. It's just a Pod, it's preprogrammed to deliver a daily basal rate of insulin. You fill it with insulin, you put it on your arm. It Senses it's on your arm, it deploys the cannula, which, for the most part, you don't feel go in. So that's avoiding your injection. I wear Omnipods frequently as a part of software trials. I've never felt the Omnipod cannula go in my arm. Eventually, I probably will, but I've never felt it go in. It's not a painful experience at all. And so it goes on and it gives you your trickle dose of basal rate for 3 days, and then it reminds you. It has an audio and a visual reminder to replace the Pod. And so you don't have to think about your basal rate for 3 days. And then it tells you, "Hey, do it again." You put it on again. You don't have to think about it for 3 days. We know it will remove needle phobia. We think there's a need for adoption there, and we'll build evidence to show that it improves adherence over time when we get it to market. We're in pilot with it right now. And as we're out talking to PCP clinics, there's clearly a need for it. And so it's often what we'll see is research where people are asking the question about, "Would you put a basal patient on a pump?" Well, the short answer is people think no, because what they're picturing is a big, tubed pump. And no, I wouldn't put a basal patient on that. But when they see the Omnipod GO, they think, "Oh, yes. Now that might make sense for my patients." And so we're bullish on it. We don't yet know because it's new to world to kind of guide to its adoption. But we think there's definitely a segment of the market that will want Omnipod GO.

And then you're trying to build a market, penetration is low. Maybe, Wayde, you could spend an infinite amount of money trying to build the market. There's an interplay between margin and investment, but then also diminishing returns short term on an investment. And how do you think about that interplay between spend and then growth/margins?

Yes, such a great question, Patrick, because we think about it all the time, as we're balancing the investment requirements, as you said, for profitability. And so in this early chapter of the company and where we're at with so much innovation in our pipeline, we're planning for operating margin expansion in a measured way over the next couple of years. And that's really to support a heavy investment thesis to build out our platform for the first time. So a few of the products that Jim just talked about are building off of what we have today. So we have, only today, 1 AID system with 1 phone platform connected to 1 CGM, and up to just a couple of months ago, in 1 country, with 1 indication for a type 1 indication for use. So what we have in our pipeline today and what gives us confidence to be in this heavy investment thesis right now is, as Jim said, building for CGM of choice with Libre's Abbott 2 -- pardon me, Abbott's Libre 2 and 3, Dexcom's G7. We're adding another phone platform with iOS. We're also doing the clinical work to get the type 2 indication for Omnipod 5. And then we're expanding into countries just like we have done recently in U.K., Germany. We're going to expand across Europe. We're in 24 countries today. So we still have a ways to go. And then after that, we've got other international expansion opportunities. Again, we're only in 24 countries today. So the way we think about it is we're going to continually step up our operating margin over time. We're going to step up our gross margins over time. We've got a lot of tailwinds in gross margin. And then once we've got that platform built on our leadership position here, we've got a real opportunity to scale. And so that's where we'll have an opportunity to surprise on the upside.

This might be a slightly strange question, but the type 1, type 2, one's been dealing with the kind of condition often since they were young. Not always, but often. The other, it's a little bit later. Is there a difference in, I don't know, customer acquisition costs to like trying to get somebody on to a platform? There might be quite different psychologies. Is there like a difference in trying to win incremental patients amongst those 2 buckets?

I think that's a terrific question and is very insightful. And we have an expectation and have had an expectation for quite a while that people living with type 2 will behave differently as customers than people living with type 1. And you just start at the simplest level. Somebody with type 1 diabetes needs insulin to stay alive. And somebody living with type 2 diabetes is often managing multiple comorbidities. They might have another medical device. They might -- and so we think that they have an even greater therapy burden. And they -- often, they have to be persuaded to initiate any therapy, including insulin therapy. And so we do expect those end markets to behave differently. Having said that, Omnipod 5 has been so well received out of the gate for people living with type 2 that we think, as we get that label, we should really have some successful adoption in that market. But we do know, and we will be developing both physical product and data products that are tailored specifically to type 2 customers. We haven't talked a lot about that because it's all earlier in the road map, but we know that there's a real need out there for those customers, and it will be a segmented market when we get there.

And then thinking longer term about competition. It's difficult to be the only player into perpetuity. How do you think about the competitive environment? Do you feel like -- what do you feel is your strongest defenses? Is it brand equity and the relationship that you build with the customers? Is it something else?

We have a lot of moats. And I'll say a couple of things. I know Wayde will want to comment, too. But the first moat is that we've forever had an advantage with the Pod format with ease of use and customer experience. So it's wearable, disposable, discreet, waterproof. And we've won on that basis for a long time prior to having an automated insulin delivery algorithms. So we had -- we enjoyed a lot of market share with that ease of use. By launching Omnipod 5, what we've done is effectively jumped up and boxed out competitors because now we have all the patch pump form factor advantages and a great algorithm. We also have a huge advantage by being in the U.S. pharmacy channel. It's very easy to access the product. The economics are such that neither the payer nor the patient has to lay out a big upfront cost to get on therapy. And the pay as you go model is not that much more expensive than just being on MDI. And so those are big moats already. There's a technology moat associated with building Pods with quality at scale. And then we're building -- we're digging another moat, which has not actually -- we haven't talked about much at all, and you might understand the last few days, which is around the fact that Omnipod 5 is cloud-connected. And so we get data from every user of Omnipod 5 when we get to see how the device performs and how the algorithm performs in the real world with every single customer on therapy. And that's data security and privacy protected, but it means we can see every corner of our customer base. And that's going to allow us to do a number of things, especially around improving the patient experience in the center. We'll be able to virtualize more steps, simplify onboarding usage. We can already see ways to improve the algorithm because we can see the data from tens of thousands of patients, which is why we've launched our study in New Zealand, and we have a couple of avenues to improve the algorithm. And over time, that will just become -- that's a self-reinforcing advantage because as we have more data, we'll improve the experience, we'll get more patients, we'll have more data. But I'd like Wayde to talk a bit about the scale advantage.

Yes. Sure, Jim. So you covered many of the advantages or moats. I think we have some typical first-mover leadership advantages with the investments we're making in IP and clinical. And as Jim said, scaling advantages, both within manufacturing and of course efficiencies across our operating systems, product support, customer care. Heavy IT investment, as Jim just mentioned, to support that data and cloud connectivity. And so we're lucky enough at our company to be just over 20 years in business and a significant investment to get to where we are today to give us this leadership advantage. And so for those coming behind us, they're going to have to invest to the levels we have to try to catch up to us. But obviously, we're going to continue to invest to continue to push that advantage. We do expect competition to enter the market. It is a high-margin, very attractive market, underpenetrated market. We do assume competition will come. So therefore, it's our job to continue to be the best on-body experience there is. And we kind of think about it like the CGM markets, where we believe because there was 2 really strong CGM players that educated the market and spent marketing dollars to move the market from BGM to CGM, from blood glucose monitoring to continuous glucose monitoring. So it may be a good thing if we see another patch pump enter the space to help us educate people why the older tubed pump form factor which is still in play today with the competition, and we can see our competitors also trying to make moves into the patch pump space, it just makes sense because that's where the market is moving. Is -- if others are going to help us spend marketing development dollars to move the market in that direction, it could be a tailwind for us if we're the leadership -- leader position in that market. So we think we do, as Jim said, have a lot of moats, a lot of advantages, a lot of ways that we're investing in the business. It's a significant investment. And the last thing I'd say is, given the annuity model that we've chosen, it takes a long time to build a critical mass number of customers to get to a breakeven or profitability. And so we've now eclipsed that. We're driving profitability. As we just talked about to your earlier question, Patrick, starting to expand operating margins, grow profitability. For somebody coming behind us, starting at their first patch pump customer, it's going to take them a good amount of time to build up that critical mass number of customers to really support the level of investment in IP, clinical, sales, operations, as we've been talking about.

So I'm just going to add one thing to that, Patrick. Really helpful color from Wayde, but also one more thing I'll say is, it's very clear to us that we have open field running for a period of time here. It's so hard to create a patch pump offering. We have the best offer in the market right now. We don't see anything in our competitor road maps that can match what we have right now. So we have open field running, we will keep chasing it. But to Wayde's point, if we end up with patch pump competition, there's a way in which that could also grow the market.

Thinking of that kind of symbiotic process with if you end up with a competitor, et cetera. In the same way, can it be like CGMs, as they move up the scale in type 2 and address earlier and earlier indications? It pre-trains and normalizes the patient, that engagement that then gets them ready for a pump? Is that possible?

We've said for a long time that CGM has paved road for us because what CGMs do is they get patients comfortable with technology and with wearing technology, which is one of the barriers to Pod adoption as people with the idea of I don't want to wear it on my body. Not a lot of patients feel that way, but they do. But CGMs teach people that wearing something can be very discreet. And it's a much better experience than having to carry around a tubed pump. So we do believe that CGM has kind of teach the market and they pave road for us. They also pave the road for us in terms of the integration because we need a blood glucose signal to deliver AID. And so as that adoption drives, we'll follow fast behind it. And that's one of the reasons -- and I think we said this already up here, but I forget now, honestly. But that's one of the reasons we believe we can drive adoption in the type 1 market to much higher levels than have been previously stated in market adoption models. We think we can get pump therapy in the T1 market well north of 70%. And that's because CGM is paving the road and because Omnipod 5 is such a simple experience, that we can bring more people out of MDI into Pod Therapy.

I feel like, understandably, the U.S. takes up most of the oxygen in the room. But OUS was a massive unmet need, but there's a complex reimbursement environment on that side of things. How should we think about that opportunity midterm? Are there any markets where you feel the penetration is still very low, but actually, we're just at the tipping point where the environment has become appropriate, if you like.

Yes, well, there is massive pent-up demand in our international markets, including Europe. We know from our visits with KOLs. And in fact, this year at ATTD, our Medical Director, Dr. Trang Ly, was presenting and was approached by many, many physicians after her presentation saying, "When will we get this product here?" So we know there's massive pent-up demand for Omnipod 5. We're very happy with the results in the U.K. and Germany. The U.K. is out of the gate really strong. We did that in the middle of the summer. I think we're about 2 weeks into the German launch, very good early feedback in our launch in Germany. And then our intent is to cascade Omnipod 5 throughout our European markets through '24, such that by the end of 2024, the majority of our customers will have access to Omnipod 5. The difference, because every market -- Patrick, as you know, every market in Europe has slightly different reimbursement, and it's a complicated kind of collage of payment models. The biggest difference between -- as a general rule of thumb, the biggest difference between European markets and the U.S. market is, in the U.S. market, the pharmacy channel is a huge tailwind for us in terms of adoption, because if you're on a tubed pump, you're in the DME benefit of your health insurance, and you can cross into the pharmacy benefit to get Omnipod 5. And that's why we saw so much competitive conversion when we launched Omnipod 5 in the U.S. because patients could just cross over. In most European markets and in Canada, it's a contract, it's a lockup period on a contract. So people are eligible for a new pump typically every 4 years, depends upon market. And so just 1/4 of that competitive conversion market is available every year to us. So we expect more MDI as a patient mix as we launch in European markets than conversion. And we will get some upgrades [ of our own ]. But even Omnipod DASH customers are often on a contract, and so they may only be eligible every 4 years for an upgrade to Omnipod 5. That will be different by market as well. What that means is tons of pent-up demand. We expect really good adoption, but it won't be that kind of runaway competitive conversion adoption that we saw in the U.S.

Jim, Wayde, almost perfect timing, 15 seconds left. So thank you so much.

Patrick, thank you.

Thanks.

And thanks, everybody for coming today.

Thank you.