Insulet Corporation (PODD) Earnings Call Transcript & Summary

All right. Okay. Why don't we kick this one off? Good morning, everyone. Patrick Wood. I run the U.S. medtech team. I'm delighted to have Insulet here. We've got Ana Chadwick, who is the CFO, and runs the finance side of things. Pat Crannell, who runs the International business, for what should be a fun fireside chat. So thanks for joining us.

Thanks for having us.

Thank you.

And thanks, everyone, for being here as well.

Just because it's topical, I'd love to start both globally and OUS with type 2. I think for those in the audience maybe not aware, it might be worth giving a quick background to the expansion into type 2 patients. And then maybe if we split it between U.S. and OUS, what it means for Insulet, what it means for growth and how you expect that to come through into the numbers?

Thanks, Pat. Great to see everyone here. Thanks for your interest in Insulet. I'll just start with a quick introduction. Insulet is about a 25-year-old company with a very big purpose and it started with a father who had his son diagnosed with type 1 diabetes. And for that, you, of course, are insulin requiring. And the options at the time were really injecting daily, multiple daily injections. And the passion of this father to solve the problem, developed the technology that we have today. And this has advanced significantly, and we'll talk more about the technology in a second. But there's a difference between type 1 and type 2 diabetics. . And the company started in type 1, and we'll talk more about that, and we continue to be very focused on growing that. And now the most recent event that happened that's very significant is at the end of August, in the U.S., we got clearance for the label expansion for type 2. And what that means in simple terms, and I'll start with the U.S. and I'll pass it over to international in a second. In the U.S., there's roughly 1.8 million type 1 diabetics, and about 40% of them use a form of technology. We are one of those who provide that technology. And we continue to grow the market, especially from converting people who don't use technology and adapt our technology, which is very cool because it's tubeless, it is very small, it's wearable. And it has a great form factor. It's weather resistant, water resistant. It's pay-as-you-go model. There's a lot of benefits there. Then moving to type 2, which is our most recent development here, is there are about 2.5 million type 2 in the U.S. that require intensive insulin to live their daily lives. And that's only 5% penetrated with technology. It gives you a really good idea of the potential we have there. And we are the only automated insulin delivery system that's approved for type 2 in the United States. So it's our market to go develop. And third, in the U.S., we have basal only. That's another 3 million people that can benefit from technology as well. So anyways, I'd just like to give that quick background and maybe you can touch a little bit on international.

Yes. Thank you, Ana. Internationally, our primary focus is in the type 1 segment. And if you look at the markets where we operate today, it's about 3.5 million people living with type 1 diabetes. And what we see in these countries is that the use of pumps is actually very low. It's somewhere in the -- overall, the 20% range of pump adoption there. So really for us right now, the near-term focus is as we're launching Omnipod 5, which is our AID solution out there, it's really focused on reaching more of those 3.5 million people living with diabetes. We know that people living with type 2 diabetes see the same benefits as Omnipod 5 brings to people living with type 1. Our SECURE-T2D trial that we released earlier this year demonstrates that. But really in the international markets, what we see is it's going to take time for treatment guidelines as well as funding to actually support more people in type 2 getting access to pumps. So we're excited with the opportunity that we've got with type 1 right now. We're expanding with Omnipod 5. And then type 2 is really probably a little bit further out on the horizon for us in select countries.

I'd love to dig into that a little bit actually, especially on the type 1 side, OUS is how does that -- how do you effect change in that funding environment? How does that discussion in practice actually end up happening with the regulator?

Yes. Obviously, clinical practice takes time to change, right? And really, what we see is it's driven by data, and that's really what it's going to come down to. And so as long as we can produce real-world evidence that shows that we're improving people's lives, we're improving outcomes, we're improving time and range, that's really the data that's out there. And I think really within the community there, over the last few years, there really has been this focus on it, that putting more people on insulin-delivery devices, in our case, the Omnipod it produces better outcome. And so that has an overall benefit not only to that patient, but to the health care system in general there. So this is something that's increasing with momentum. And I think you see certain countries are a little bit further down the track on that. But I think this is something that will continue to accelerate, at least internationally, that, that 20% pump penetration is going to continue to grow. And if were to just contrast that with the U.S., the U.S. is roughly around a 40% pump penetration. So there's a lot of area for us just to continue growing and getting more people on to Omnipod.

And then maybe just to finish up a little bit more on the type 2 side of things, Ana. You have definitely not awesome for a '25 guide. You have definitely don't. You have the unenviable task of thinking about how that sort of ramps. And there isn't, I mean, really a precedent type 1 and type 2 patients, it's quite different in how to they -- just qualitatively, how are discussions about that internally? Do you have a divergent set of opinions within like the Insulet team of the speed of that? I'm guessing you do. And like what are some of the puts and takes of that discussion that happens internally on how people think that adoption curve looks. Do you see what I mean?

Yes. No, I think it's the question of the hour for sure. And listen, we've been very thoughtful about how to invest in the market through sales force expansion, through direct-to-consumer and all that, that brings along and we can talk more about that. The market development is we are there breaking into this market, opening this market. And what I will say kind of qualitatively is early indications since we launched are pretty aligned with our expectations. So we're seeing the demand. We're seeing the new customer starts come in. And we will give it a little bit more time and we'll come back in February with the latest view that we have in our guidance for '25.

Love it. I'd love to drill in a little bit to OUS. I mean how has the -- to your mind, the Omnipod 5 reception been? Has it been different between different markets? We always say OUS or international, but as I know more than anything, that's a wide selection of different markets.

Yes, it's a great question. So Omnipod 5 is our newest offering, and we just started launching it outside the U.S. last year. So our first markets were U.K., Germany last year. And then as we moved into this year, we've since launched in France and in the Netherlands. Really, the feedback, it's been amazing. We've really outperformed our own expectations in each one of these launches. And what we're seeing is we know Omnipod 5 is a great product, and the evidence continues to build and demonstrate that. But when we enter these markets, the amount of pent-up demand that is there has really surprised us. And if you've seen our financial results this year, the International, we've been raising our expectations as we move through the year here. And it's largely due to those launches that we did last year. Because we operate in this annuity model, so as we add customers this year, we really feel that, that benefit as you get that full year, that annualization of them. So really, the launches in the U.K. and Germany have contributed significantly to some of the growth we've seen this year. With that said though, our core business in all our regions has actually grown. In Q3, we grew in every region where we operate around the world there. So what we're seeing though is there's a great demand out there. Those early launches are really benefiting us this year. And then obviously, as we move into '25, we'll get the annualization of the '24 launches. And then as we've shared, we have 10 new countries that we're going to be launching Omnipod 5 into as we enter 2025. So that continues to give us growth as we move through the years here.

From my seat, if I zoom out, many of the diabetes companies in totality, including the CGM players, the international has markedly picked up. It's been very noticeable and it's been broad-based. Has something changed or happened? Has there been more of a receptivity to paying for this? Or is there a dialogue change? You know what I mean because it's really picked up.

I think it comes back to my point of the data needs to back it up and the evidence is there. And I think the CGM growth has been a nice precursor that you see, hey, people living with diabetes, we introduce technology and they're actually -- their health improves in the way that they can manage and monitor their health improves and the benefits you see with that. And so I think it's been a natural outgrowth of that as these AID, which is the automated insulin delivery systems, which Omnipod 5 is. So we communicate with the CGM to then dose the insulin there. And really what you've seen is, again, the evidence shows rate improvements in time and range for these individuals. And I think that's really where you're starting to see that turning point. Now obviously, it needs to bring value to health care system. So the payers are going to look at that and say, okay, what cost am I avoiding here or where are the savings within the system there? And I think as this continues to grow, the evidence is pointing to you avoid that patient going to the emergency department for a treatment because they're able to maintain glycemic control. So I think it really has been the evidence and the awareness out there. It gets back to that clinical inertia, the more people get experience with these systems, they see how simple Omnipod 5 is. And then as patients come into their office, they're more willing to try that product on these patients because they've seen the outcomes and the improvement that it brings.

You guys are entering 10 -- I think it's 10 new markets, basically, on the International side. A, what were some of the learnings in the core markets that you think can help you in those? And b, how do you -- you've got a large road map of places you can play, what are some of the factors that lead you to choosing those 10?

Yes. So really, when we look at it we know product's fantastic and it can help people around the globe, right? And that's really a challenge for us, is how do we get it into new countries to serve the most people that we can. And if you look at the launches that we've done to this point, really with U.K., with Germany, with France, those are some of our larger markets. And so those are markets that there's an established use of pump technology, there's market access and reimbursement pathways for us there. And we know that when we get on market, we can reach a lot of patients. Really, if you look at the next set of markets that we're going to be bringing Omnipod 5 to, they represent a significant part of our business, but these are markets that we've built up a DASH business. So that was the generation prior to Omnipod 5. So we have a good customer base out there. And really, we're looking at those markets that we can build upon that and now bring it to that many more patients. . As far as the learnings, it's really been a capacity challenge. And different health care systems have different models, how they provide the care to patients. Whether it's in France, they're using the prestataire model, which is more of a home care type model. In the U.K., it's a hospital clinic type model, so where the patients are seen and how they receive their care. And really, when Omnipod 5 comes to the market, we actually enlarged the number of people that are using pump technology. Due to the simplicity of our offer, there's people that are doing multiple daily injections that would never consider going on a complicated tubed pump solution. But when we bring Omnipod 5, there's patients that are saying, "Hey, I want to try that. I want to come and start using Omnipod 5." And what that does is it puts the capacity constraint on a lot of these health care systems of how do they actually onboard these. So one of the early learnings for us is we said, Omnipod 5, it's so straightforward, it's so simple, we can do virtual training. And beyond just virtual training, we can do virtual group training. So it's really working with these health care providers to say, you're going to have patients that are going on to access Omnipod 5, how do we make it as seamless as we can for you, your staff and for that patient to experience Omnipod 5. So it's really been changing clinical practice in a way. There's an example we've seen here in the U.K. that they went and they moved to going group starts for Omnipod 5. And they said, look, it's quite simple. We're going to do a group start of 60 individuals at a time. There's no way you can do that with a tubed pump. There's just too many parts and components, and people are at different places in their learning curve. So it's really the simplicity and how we open up that capacity for the health care systems.

I definitely want to come back to International. But relative to some of your 2-pump competitors, one of the notable things for pod is your margin structure is considerably better, which no one ever would have guessed 10 years ago given it's a disposable product. Maybe could you give the audience a bit of a vision for how you think margins will evolve over time? And also as part of that, a little shorter term, but maybe the background of the Malaysia facility and the benefits?

Great. No, thanks for the question. Ourselves as overall industry in medtech, international margins tend to be lower than U.S. margins. And that's consistent. Starting with the U.S. In the U.S., we moved from the durable goods equipment to pharmacy. And through that process, we actually saw price lift in the U.S. Now in our latest third quarter earnings, we reported that virtually 100% of our U.S. volume is through pharmacy. So we anticipate just to continue to the strong pricing in the U.S. As we move to international, as Pat was mentioning, Omnipod 5 is winning everywhere it goes. And the good thing is the data is very strong. And as we've been talking to the different health ministries and everything, they have acknowledged the value that it brings. So we have seen at different levels, put price appreciation as we've launched the Omnipod 5 automatic insulin delivery product in the international markets where we've launched. So as we look at gross margin, we anticipate continued growth, but at a smaller rate than what we have experienced in the past. Having said that, we are incredibly committed to delivering gross -- operating margin expansion of at least 100 basis points a year. And we can do that because we get scale. And with the scale, of course, we've been growing 20% a year for the last 9 years, as we've guided here in 2024. That brings us our ability to scale, and to scale ourselves in many of our enabling functions and in many of the things that we do. But also scale from a manufacturing capacity. So we launched our new manufacturing facility in Malaysia. It is actually from a rooftop perspective, double the size of our Acton, Massachusetts facility. And the great thing that we have is we've leveraged the automation that we've already implemented in our other facilities as we've launched in Malaysia. So we anticipate to be slightly accretive even to margins in the first year of operations. And the other thing that I'll mention on Malaysia, which, of course, we're very excited about, is with that capacity that we've added and we continue to add production lines into that rooftop, we have enough production capacity for the next 3-plus years. So we feel we're in a position of strength, both in the top line and also in our margin expansion and delivering in the bottom line.

One question that frequently comes up is with label expansion and that of things and the sheer amount of growth in the market, how do you think about the relative investment rate and requirements to drive in the U.S. type 2 adoption, OUS type 1 adoption? How do you think about the investment rates and what that means for margins?

Yes. No, that's a great question. And I'll start by saying we are cash flow positive. And as cash flow positive, we actually have the capital to invest in ourselves. And from a capital allocation priority -- and I joke about this a little bit, our #1 priority is investing in ourselves, #2 and #3. And we do that because our strategy is very simple. We have a 3-pronged strategy. We want to expand our Omnipod platform. By that, what we mean is we want to have connectivity to all the CGMs. We want to have iOS, iPhone, Android. We want to make it as seamless as possible for anyone out there to adopt to our technology. We want to have more data capabilities built there. So that's number one. Number two is we have the leading type 1 in the U.S., type 2 is huge. So we're going to continue to invest there. And number 3 is how quickly can we go into the international markets. So that's a pretty simple strategy, and that's how we go about allocating our capital. We invest between 10% and 12% of our revenue in research and development, and we continue to do that. Of course, there's still a lot of things that we have in the horizon that we're investing not just for the short term, but for the long term. And that cash flow positivity is what allows us to invest in ourselves.

That R&D investment, you already have an excellent algorithm. Like the algo is great. The form factor is great with O5. I mean I'm not an engineer, but they're certainly so small you can make a pump with a reservoir and things like that. And integration with the CGMs, iOS, we got to know. So is there a point where you might be able to dovetail off a little bit of the R&D? Or, to your point, is there enough in the pipeline that you just see that? And do you want to tell us what's in the pipeline?

So nice way of asking. But of course, we can't share. But actually, we do see a lot more in the pipeline. We do see a lot more that we can simplify the lives of people with diabetes and that's really exciting and good. In addition to that, we continue to see -- I mean, we're not in many markets, I mean we're only in 25 markets around the world. And there's a huge demand. It has to be the right market. It has to have significant CGM penetration already, there's significant insulin prescriptions, the right reimbursement environment and things like that. But there's a very capable theme here with Pat that's constantly analyzing where to go next. So we feel very good with where we are. The other thing I'll say is with this cash flow positivity that we have, we will continue to strengthen the balance sheet. We have convertible debt coming up in 2026. We don't want to let that go current. It gives us a lot more optionality in what to do with that. And we're very selective, but we have a very strong team on strategy looking at capabilities out there in the market. So we'll continue to explore all angles.

I'm definitely losing track of time. I can't remember whether if it was Monday or Friday. But obviously, I mean calendar-wise, calendar-wise. But the -- I mean you got Libre 2 Plus integration on the CGM side. I think it was Friday or Thursday or something. And in general, the CGM integration has been going better. I guess both for U.S. and then also OUS, how do you think about the precedence of what that did for your volumes when you brought new integration on the CGM side onboard, when you simplify people's lives by getting iOS on board? How do we think about the pickup or not of volumes? Is that a very gradual thing?

No, this is a great question, and this is to make everything less friction to come into our products. So just to recap, over the summer, we -- late summer, we launched G7 integration in the U.S. Then we went out and we did iOS, and I'll touch on that because the feedback we've been getting is it's transformative for people to just be able to carry 1 device, which is phenomenal. And then we, as you mentioned, Libre 2 Plus. Now Libre 2 Plus, interestingly, we've had it in the U.K. and Netherlands. And I'll let Pat talk a little bit about how that has happened, how the adoption there because it's been operating a bit longer. But we have seen, as we have anticipated and in line with what we've guided, the ramp of people having that preference for their CGM. And now that we've opened up those pockets of the market, we have seen a ramp of new customer starts. Very lucky to have both Abbott and Dexcom as partners and really in continuing to stay close to them as they develop new technology on the CGM, that we can continue to pair up into the future. But maybe you want to comment a little bit on Libre 2 Plus in U.K. and Netherlands.

Yes. Thanks, Ana. We launched earlier this year with the Libre 2 Plus integration. So at that point, we were on with the Dexcom G6 and with Abbott's Libre 2 Plus. And really having multiple CGM options, it speeds the access to Omnipod 5. Because the customer doesn't need to go back, see their doctor, set appointment, get a new script, change the CGM that they're on, they choose the CGM that fits their lifestyle. And so having that, we're going to launch G7 internationally in the first half of next year for us as well. The more sensor integrations we have, it just reduces friction in the system, it reduces friction for that patient to be able to access Omnipod 5 quicker. And it's a little bit of that differentiation back to your question of investment. There's so much we can do to invest in ourselves. We're generating so much data, and that's really going to become the next chapter for us as we move forward here, that we need to be the connected device with as many partners that are out there, and then we need to take this data and provide insights to the health care providers and to the users, our customers of the product. And that's really where we see that next frontier. And we're going to get there by continuing to invest and continuing to integrate.

I know with sometimes the U.S. companies mentioning competitors is like mentioning Voldemort or something. But basically, I'm curious for the International business, some of the same players, but the weighting is quite different. How do you see the competitive environment? Do you feel like the competitors are investing the same proportionally internationally as they do in the -- like do you see what I mean is the texture the same between the 2?

It's interesting. Internationally, we have a few different competitors that you don't see present U.S. today. But really, if I were to talk about that, any of the competitors that we face internationally, they can't match what we offer today, right? We're the only tubeless, waterproof, form factor, multiple CGM integrations, real-world evidence out there to back up what Omnipod provides. And I think from that perspective, that's why we continue investing. We have this head start on the competition, and we're really running in a lane of our own right now. So for us, it's really continuing to build on what we have out here. And again, expanding the penetration of pump technology. That's really what we're doing right now.

Ana, the capital allocation side, cash generative, margins going up, balance sheet is in a good spot. At some stage, you'll have a very good problem of working out what to do with the money. How do you guys think about buybacks relative to M&A, relative to, I don't know, organic CapEx? Like how do you think holistically about what to do with the dollars?

Yes. No, that's a great dilemma to have, of course. And the way we think about it is quite simple, actually, invest in ourselves, invest in ourselves and invest in ourselves. And the other thing that I mentioned, of course, we have the convertible debt coming due in 2026, we don't want to let that go current. So we're exploring alternatives on the most efficient use even of our own cash on hand. So I would say that, that really ends there. But as I mentioned before, I mean, our strategy team is really strong, and they're out there looking for potential investments. The real challenge the team has, and I say it with a smile is, got to be top notch accretive to what we're doing. And that's why I continue to insist investing in ourselves is the best solution. But we're not immune. We also actually are investing, and I know we touched on this at the beginning, on our type 2. We always scale our sales force. Every year as we've been growing, we continue scale that. In the same infrastructure that we have today, we are scaling that. And we're putting more dollars into direct-to-consumer, and that's really to tap into our U.S. opportunity for type 2 in addition to strengthen. So the beauty of that is our advertising dollars become that much more efficient because before you were targeting the type 1 population, and now it's more eyeballs watching the same add that can get you even more productivity. So we're already seeing some of the fruits of that here even as we are in the fourth quarter.

That's a good point. I haven't thought about that. I think that's almost perfect timing. It's a massive thank you to both of you, and to the audience, for everyone. Thank you.

Thank you very much for having us.

Thank you. Thank you very much.