Insulet Corporation (PODD) Earnings Call Transcript & Summary

Amazing. Perfect. Well, hopefully, everyone can hear me. Welcome. This is Patrick Wood. I run the U.S. med tech team. I'm thrilled to have Lauren Budden here, who's the CFO of Insulet; and Deb Gordon, who runs IR and Communications, what should be, I think, a fun back and forth, talking about an exciting time for the company. And so I think why don't we just hop straight into Q&A, if that works?

Sure.

Amazing. Maybe if we start -- and unsure how familiar some of the audience are with some of the topics, it might be worth going over them. But O5, Omnipod 5, big, new product for you guys, great adoption in Q3. How are you thinking about the success of that platform and the movement into 2024?

Yes. So thanks, Patrick. Omnipod 5, we've been thrilled with the success of it. It's been amazing. We've launched it in August of '22. So it's been a little over a year now. And it's been really fueling our growth. But we kind of look at it as, when we launched it, it was just our first-generation product. So it's really the minimum viable product. It was only offered in one country, the U.S. at the time. It only was integrated with the Dexcom G6 sensor. And it was for Android. So now as we're looking forward to 2024, we're looking forward to expanding the platform really. And so we have a lot of exciting innovation coming up to expand with sensor of choice and with iOS. And we're also expanding in other countries. So in June of this year, we're delighted to bring it to the U.K., and it's been phenomenal. We're seeing the same, similar results as in the U.S., just amazing growth with the new customer starts up 70% quarter-over-quarter, quarter sequential, and revenue up 45% year-over-year. So we're seeing just a strong growth in the U.K. and then we followed that with Germany in August. And so we'll see those continue to pick up in 2024. With our recurring revenue model, it takes time for it to really meaningfully impact our growth rate. So we'll see that happening next year. And we're also going to be expanding into additional countries. So the next country that's slated is for the Netherlands in the first half of 2024. And then we'll progress from there as well.

And maybe for the audience members who are less familiar with it, how -- what do you think excites you the most about Omnipod 5 relative to prior generations? Like what do you think is resonating with customers overall?

I mean, the AID really. Everyone was waiting for the AID. It's just game-changing technology and the outcomes. So yes, really just world's -- a big leap in technology, I would say.

And that automation on artificial pancreas, if you like in a way, that obviously relies a lot on the connection. And that's expanding quite a bit in 2024. You mentioned iOS, better connectivity with the CGM side of things. How should we think about the implications for growth for Insulet overall? As the connectivity gets better, more applicable to more patients, how should we think about that growth dynamic?

Yes. So with iOS, that one is interesting. And we kind of have an internal debate on what is that going to really do for our growth trajectory. And I think where we kind of land is that people aren't waiting to go on our product just because of iOS. Do they want it? Absolutely. It's the #1 requested feature. So it's going to be satisfying to our customers. And maybe it helps with retention and all of that. But we don't think it will be a big bolus of customers that have been not wanting to go on our product because we haven't had it available for iOS. But we do -- we will get some benefit from that. And then was there another...

CGM integration.

Yes. So CGM integration, I would say, we're working both with Dexcom and Abbott. With Dexcom, it's really them pushing to the G7, right? They want to phase out their G6 and get to G7. And so we may be holding that back a little bit. And with Abbott, that's going to open up just additional market for us. So I think that of the two, from our perspective, that would be probably more meaningful growth than just converting up to a G7.

I mean, to be provocative, is there any reason why then being integrated with Abbott, I mean, that's a huge part of the market that you didn't have exposure to in a way before, why that we shouldn't see growth accelerate off the back of that?

Yes. No, we absolutely -- all of these things, I think, are going to be growth accelerators. And that's why we're really excited about all of these catalysts. So I think we take all of them together. And I think we're very well positioned for growth.

Yes, Patrick, I'll say if we go -- we're with Dexcom today. Omnipod 5 has taken off. Dexcom has been a fantastic partner. G6 is great. G7 will be just as great, if not better. Libre, there, Abbott has been a fantastic partner of ours. They were on our PDM for classic Omnipod. But we don't have integration with them. No one does yet. So yes, it opens up a whole category for us. And they do really well in type 2, right, in certain markets and really well internationally as well. So all of those things will help fuel CGM, help fuel pump adoption. Abbott is such a great partner that Libre, for sure, is one of many catalysts in '24 and beyond.

I think that's a great pivot to talk about type 2 diabetics. It's a different disease from type 1. Some of the patients haven't been living with it necessarily as long, not always but typically not. How do you think -- and pump penetration today is very low among type 2 intensive. So how do you think about approaching that patient pool? I think you've already had some off-label utilization. So kind of what's the takeaway from that? What makes it different as a market to approach relative to type 1s?

Yes. So we've had about 20% of our customers are in type 2. And that's a market that we play in, in the -- mostly in the insulin-intensive space with our DASH product. But we've also said that we've had 95% of new customer starts are coming from Omnipod 5. So if you do the math there, you can tell that there is some off-label use of that. We don't promote it and condone it. So we are looking forward to having an indication for a type 2 in the future because we can already tell that if this is already happening without our ability to market it, that there's this pent-up demand that's likely there that will really benefit us in the future. But you're right, the dynamics for type 1 and type 2 are different. And so with type 2, these are people that usually aren't in great control and they have a lot of things to think about. They might have several different diseases that they are trying to monitor and manage. And so it's a very different just population that we need to be thoughtful about in terms of kind of entering there with more on the Omnipod GO side. And I don't know if you want to talk about that. But with our basal Pod, our Omnipod GO is our basal Pod that's meant for those more early stage. And that's where we have to like try to see if we can make things simple for those customers. I don't know there's more things you want to add there?

No, I think that was great.

I mean, you brought up basal-like. Is the hook there to turn people into Podders earlier upstream? They're just -- they get used to the product. Even if they don't necessarily utilize it 365, they're in the ecosystem, if you like and then it's easier downstream. Is that the idea?

Yes. I mean, it definitely would get them earlier in the disease state and make a transition easier to our other products. And we'll see where -- we have a pilot going on for that. So it's early days. And we're going to take those learnings and then see what happens. But one of the things that we were pleased to find out about is that not only are we educating the PCP channel, because that's where we're looking to offer this product, but they're actually learning a lot about our company. So when we go in there and we talk to them about Omnipod GO, they're asking questions about our other products. And we're able to show them DASH right now, not Omnipod 5 because it's not indicated for that. So it's a wonderful opportunity that can give exposure just to Omnipod family of products in general that we're really looking forward to.

Patrick, you made a great point. Does it get people on product earlier? Absolutely. So is that the main goal? So for people who don't know Omnipod GO, it's new for us. It's a novel product where think of our form factor, which looks like half of a hard-boiled egg, hard-boiled egg cut in half. You put it on your body. With Omnipod GO, it's meant to be that simple. You put it on your body and you go, so still that 3-day wear. It will come in different SKUs. I believe it's up to 7. And you work with your doctor on the right titration and then you fill it with insulin, you put it on. But it's meant to be -- like as simple as our product is today, this is that much easier. You don't have a handheld. So you put it on, you don't have to touch it. And it gives you that right basal rate over that period of time. And it's early days, as Lauren said, so we'll see what the needs are of the market. But it's allowing us in early to speak with PCPs that we otherwise would not speak with. And these are PCPs that otherwise would not know about or prescribe Omnipod. So it's interesting, the conversations. And we're learning actually today that quite a few people on Omnipod DASH, which is our non-AID product, it's the generation that's Omnipod 4 technically, but it's Omnipod DASH. People are using it some for basal-only. So this will be a much easier on-product. At the end of the day, whether they choose DASH or Omnipod GO, we'll see. But to your point, Patrick, as their disease progresses and they then progress to basal bolus, which is insulin-intensive, the natural progression is on to Omnipod 5 or perhaps Omnipod GO. And that cost to acquire a patient is far less because they're already on product. So once they go on to Omnipod 5, there's really no cost to acquire.

And on the PCP side, I guess, that's one of the things that sort of slightly differentiates type 1 and type 2. Type 1 is typically endos, type 2, a little bit more PCP than usual. So I guess, one, is there a thought process around the sales force and how you approach PCPs in general? And then two, I guess, right now, there's a lot of people calling on the PCP within diabetes. Because the CGM manufacturers are also saying, "Hey, you considered CGMs within your basal population." So is there a synergy between the whole industry approaching kind of holistically between the informatics and the drug delivery side that's just everything going at them at once? Does that sort of help within that conversation?

Sure. I can start, Lauren. I mean, I would say yes. But TBD as far as we're still in very early innings with a pilot program and early innings for us. So our CGM partner, one of our CGM partners, Dexcom, has had great success, they're in that channel. And we're learning a lot from that. And I think what we will find is we'll learn a lot about going into the channel. So Patrick, you asked, do we need a commercial sales team? TBD. We'll see, there are benefits to it and then there are benefits to a current sales force having everything in their bag, selling it and going on different call points. But I think that's TBD. What we are finding with Omnipod 5 is the number of prescribers has significantly increased over the last few quarters. And in the U.S., where there are approximately 7,000 to 8,000 endos, we -- sorry to look at this data, in Q1, it was over 11,000 people were prescribing Omnipod. In Q2, it was over 15,000 and in Q3, over 17,000. So we know it's beyond the endos. Now some of those are within endo practices. They are nurse practitioners, for example. But we have seen a steady uptick of PCPs prescribing it, and it's not because we're calling on those PCPs. So I think the awareness is growing. And then as we start to enter that channel more robustly, then we'll be able to determine what the right level is of a sales force and quite frankly what the right product is.

How do you think about building that awareness as well, like more DTC marketing? It's -- spending the marginal dollars, there's always an interplay between going to the PCPs and the endos versus awareness with the consumer on that side of things. I know your partner, Dexcom, has become a bit more intense on the DTC side than they used to be. But they've probably overspent, my words, not yours, on endos before. So like how are you thinking about the relative sort of puts and takes of marketing, I guess?

Yes. So DTC is definitely something that we've done. And it can be quite effective. What we found is that if we kind of do a steady stream of it, it's more effective than if we're dialing it up and dialing it down. So we may -- while there might be some of that, we probably see more of a steady state going forward. But these are the things that we need to figure out with especially entering in the PCP market with -- it's so spread out, what's going to be the most effective use of those dollars. And maybe it will be through DTC versus having the sales force. But that's what we're hoping to learn from the pilot study that we're doing now.

And then maybe for people who are less aware, maybe it would be useful to sort of set the scene around where -- and it's up to you whether you go overall pump penetration or patch pump penetration, where penetration is today, type 1, where that could, in theory, cap out and how you think about type 2. Are there any reasons type 2 couldn't get to the kind of place that type 1 ultimately does in your minds?

Yes. I mean, maybe I'll take type 1, you take type 2. And so the pump penetration for the overall market is around 40%. It's -- not that long ago, it was around 30%. So it hasn't expanded all that much. But we do see with AID and with our patch pump that we can really grow this market. So we wouldn't be surprised if it would get to somewhere in the 70%-plus range over the 5- to 10-year time frame.

Yes. I mean, it's evolved so much over time. I mean, there was a time years ago where everyone was saying -- so it was kind of holding steady at 30%, right? Then it went to about 1/3 as technology started to improve. Now it's about 40%, as Lauren said. And at one point, years ago, well before AID, we're saying it would cap at 50%. Now we're confident we can get beyond that, as Lauren said, over 70%. Type 2 is that much less penetrated. So for those who don't know, in the U.S., there are about 2.5-or-so million individuals with type 2 insulin-intensive, so basal bolus. And in the U.S., it's 5%-ish. It's probably less than 5% penetrated. Internationally, it's about 3.5 million or so in the markets that we're in and it's less than 1% globally penetrated. So huge TAM, takes more time to penetrate. And we're incredibly well positioned to penetrate the type 2 market in the U.S. because of the form factor, more importantly, because we're in the pharmacy channel. So the pharmacy channel, there's really no distinction. It's easier channel to go into. There are a whole variety of reasons for it. But people can get on Pod therapy a lot more quickly. So that's why we have quite a few, in fact, 20% of our U.S. new customers over the last few quarters, even more than that a year ago, are type 2. And so we've been winning in the space with the ease of use of the product as well as the pharmacy channel. So a lot of room for that. The TAM is enormous for type 2.

To flip it on its head in a way around form factor, why would somebody go for a durable pump over a patch pump? I'm aware I'm asking you to validate your competition. But like why would I choose a durable pump?

That's a good question I think we often ask ourselves why would they want a durable pump.

I think there's a place for everything, Patrick. I mean, at the end of the day, look, there's room for plenty, right? You could ask the same question, why people still giving themselves multiple daily injections. I mean, I don't like needles. I couldn't see myself doing it. You do it because you need insulin. And for whatever reason, people may find that less complex than the perception that AID technology is more complex. It's kind of an old way of thinking. Because the traditional tubed pumps, there have just been historically a lot of steps to get on to the product, many, many hours of training. And it's more complex. There are tubes, there are dials, there's all this that you need to think about. You need to disconnect in order to shower, in order to play sports, do all these things. So we ask ourselves, why would someone not go on to Pod therapy that's tubeless, super easy, you get on it. Some of it's perception. Not every endo -- awareness is still pretty low. And it blows my mind, but awareness is still pretty low. So a lot of endos don't realize that there's Pod therapy out there. Some people don't even know that it's waterproof. Some endos don't yet know that it's tubeless and a lot better than where we started. But at the end of the day, the less complex we can make our product and the more aware we can make endos and the people choosing products, that's when we're finding we're having great success. So it's a great question. I think there's brand loyalty in any product. It's nice to have competition. Some of our competitors spend a lot of money, too, to raise awareness, which helps raise awareness for us. But we do think that Omnipod 5, by and large, is the best AID system out there.

I'll repeat a question I got just this morning, which is why aren't there more competitors in the patch pump space? Because you just painted a good picture that durable is quite difficult to manufacture, too. Patch pump is obviously outgrowing durable pumps, visible to everybody. But quite a lot of capital is still going into durable pumps. There's sort of one other patch player. I'm not going to talk about that because I'll have Morgan Stanley's lawyers all over me, so I'm going to shut up about that. I know you can't really talk about that either. But they're kind of locked away anyway. So why? I mean, like what's so difficult about the pump that makes it, to your mind, hard to replicate?

Yes. So it's a great point. I mean, our company was established about 2 decades ago, so -- and this is all we do. And it took us this long to get here with Omnipod 5. So we -- it took $1 billion of investment and lots of years of losses. We just turned profitable in 2018. So you have to have a strong stomach here to survive that long with all those operating losses. It's very difficult to do. There's lots of pieces in that little Pod. And it's really hard to also do it at scale and do it profitably. And so that's why we feel like we're here. Certainly, we expect competition at some point. And like Deb said, in terms of just growing the market, having those marketing dollars in another player could actually be beneficial to us in helping kind of expand that for us. I don't know if there's anything else?

No, I think it's a great question because we've been asking that for years. And we've been expecting it for years. And look, there are so many companies, Patrick. You know them, they've been trying to develop their own programs. It's been really challenging. You do need, as you said, a strong stomach for it. And because we are, we have that platform. That's what we think about every single day, that is what we think about, it's Omnipod. How can we do different generations? What can we build off of this incredible platform that we have? Sometimes it's more difficult for larger companies because there are a lot of dollars that they need to allocate within different divisions. It could be a smaller company. My god, manufacturing is not cheap, right? It's not inexpensive to build. We've built this world-class U.S. manufacturing. And that's what's really helped improved, as Lauren mentioned, like key learnings that we got from that we implemented elsewhere. It's difficult to manufacture. It's tens and tens of millions of Pods a year and have the gross margin improvement that we have and that we expect to continue to have and do that. And think about it, we build a Swiss -- we always laugh. We build a Swiss watch that you take off every 3 days. It's a challenging model. And it took us a long time to get there. So I think that's it. And then also IP. I mean, our teams have done a wonderful job more so concentrated in the last 5, 6-plus years, building strong IP. And I will say that's a moat that we continue to focus on that's really helped protect our product.

You sort of brought up the margin structure side of things. And I'm guessing at the start of every year, you have people coming up to you, and there's such a tricky interplay between low penetration, ability to grow, take the market, convert people, attempting to spend as many marginal dollars there as possible versus trying to decide what to allow to drop to the bottom line and like the interplay. How does that discussion work internally? And how do you think about the margin trajectory over the next, call it, 3 years?

Yes. So in terms of margin direct trajectory, fabulous margin expansion in Q3, and we just raised our guidance to 66% to 67%. When we started the year, the guidance was 65% to 66%. So we're doing lots of things in our manufacturing to become more efficient. But one of the main things that's driving that is just the sheer volume of Omnipod 5s that's helping put more product through the plants, makes it more efficient, spreads those fixed costs over more Pods. And as we're -- Deb mentioned, we built Acton manufacturing, which is our automated plant. We took those learnings and we applied them to our contract manufacturer, which was already up and fully utilized. So we were able to get benefits there. And we will continue to do that with our latest manufacturing plant in Malaysia that is slated to come online in 2024. So we're always doing things to kind of improve that gross margin. And then as you mentioned, there's a balance, right? We have lots of investment opportunities with sensor of choice and expansion and just a wealth of things. And so we have to be prioritized on where we're going to invest and what's going to get the biggest bang for the buck for shareholders. And as we look toward the future, we are expecting more operating leverage. We just also increased our guidance on the operating margin line, too. So we started the year, and I think it was a range of -- or it was high single digits. And then we said, okay, 9% to 10%. Most recently, we said at the higher end of that range, so potentially double digits. So we're seeing that come through now. We've had to make some investments just in our infrastructure as well. So with ERP systems and customer service and all of that, just to be able to scale and handle the volume that's coming through with the OP5 launch. So now that we have most of that behind us, we would plan to see some expansion going forward. But it's always a balance of how much you drop through and how much you reinvest. But it's something that's a priority for us.

Makes sense. I guess, this is always a tricky question. But what are you surprised that you're not asked about a little bit more? I mean, Deb, in particular, you've done a lot of these meetings, these things, you get a fairly consistent range of questions. But that doesn't always match the discussion internally and how you think about things. So what are you surprised you don't -- or that you get asked about loads? As an example, I'm always surprised on the fixation of conversions from multiple daily versus competitor conversions. I don't understand why it matters personally. But anything in that realm where you're surprised or just stands out internally but not externally?

Yes. So in terms of things that we don't get asked all that much about that might come to a surprise is just the data. So with Omnipod 5 and the fact that it's integrated, we have a vast amount of data just from our users that we're getting all the time. And that's really valuable, and that will help us to be able to create better iterations of products and serve our customers going forward. I don't know if there's anything that you...

No, I think it's great. You actually -- that was interesting that you asked -- because you're right, I take like a whole bunch of calls every day. And I don't really kind of put it in perspective of what am I like most surprised being asked. But you're right about that mix. Does 80-20 matter? Does 65-35 -- it shows the power of Omnipod, historically -- so just so people know why Patrick asked that, historically, we get 80%. Our main market is MDI. It's multiple daily injections. That's what we designed Omnipod 5 for. And it's historically been 80% comes from that market, 20% competitive share. But you're right, everyone is so fixated because with Omnipod 5, people were waiting for it. And it wasn't just our customers, it was other customers and it was MDI. So our mix coming from competitive tubed pumps went up. But both went up. MDI went up in competitive switches. So it doesn't mean MDI or anything came down. It just means in time, it goes back to that historical. But I've never really thought about that, Patrick. It's a great example of some of the things that people will focus on. And then that digital, the data flywheel that Jim has this concept, and he did it beautifully at ResMed. And so we don't talk a lot about it. We will reveal it more in time. But from a competitive perspective, we don't talk about it a lot. But Omnipod 5 and the power of the data that we get from the cloud and every day from our customers will be very powerful. So more to come on that. But we are a little bit surprised. It was here, if I remember a year ago, that Jim talked about it in a little bit more detail. And I think maybe it's settled in for some people. But we don't get asked that too much. But hopefully, we will in the future when we reveal more.

Nice, very nice. I think almost perfectly out of time, so thank you so much, really appreciate the time. And thanks, everyone, for joining.

Thank you, Patrick.

Thank you.