Insulet Corporation (PODD) Earnings Call Transcript & Summary

Well, good morning, everyone. We'll go ahead and get started here, just to make a quick housekeeping announcement that presentations are not open to members of the press. With that, I'm very pleased to welcome Ana Maria Chadwick, Executive Vice President and Chief Financial Officer for Insulet. As with all these sessions, if there are questions, feel free to raise your hand, and we'll get a mic over to you so that people participating in the webcast can hear as well.

Maybe we'll start with -- I think this very top quality leadership transition. I think the timing is probably mostly what surprised people. But maybe now you've had a little bit of time to kind of reflect on the transition in leadership. Maybe give us latest thinking, help investors recontextualize the move and how things are going?

Great. So we welcomed Ashley about 6 weeks ago, and we're very excited. There's never a better time to make a change than from a position of strength. And the Board had made an assessment and assess that what took the company from $1 billion to $2 billion, the skills are slightly different, what it's going to take to go $2 billion-plus. So the scale, leading at large scale Ashley has from Johnson & Johnson and her consumer med-tech intersection are going to be really, really valuable. So we're very excited to welcome her. And so far, everything is going really well.

Excellent. And I think with her appointment, there was -- obviously had the second quarter earnings call, and there also is a small [indiscernible] on the day of her announced move into the CEO role. And one of the things at least that struck me and appreciating that we're newer to the story, is the focus on globalization. Maybe as we thought about Insulet, we kind of -- there's obviously still remaining opportunity in the type 1. Type 2 is blue ocean and then obviously, global -- globalization represents a big opportunity. Was that a signal to us that the priorities are rescaling with globalization moving up and type 2 is moving down? Or how should we kind of think about the general prioritization of growth?

No, that's great. Our priorities remain intact. We will continue to work through them. But just to recap, our priorities are type 1, type 2 in the U.S., huge markets, both of them, Type 2, as you mentioned, even bigger. Type 1 international, another 3.5 million people in the markets we serve, only 20% penetrated, a lot more to do. We'll keep advancing our platform. So priorities remain intact.

Okay. And both -- it's interesting, both you and Ashley come from different types of industries. [indiscernible], obviously, she's in med-tech. But both come from more diversified businesses that are arguably slower growth profiles in their end markets and in respective companies. How are you kind of thinking about that -- and you've been here a year or so transitioning and navigating to running a pure-play growth company?

Yes. Listen, I will tell you, it starts with the word fun. It's really a lot of fun to be in a fast-growing dynamic, innovative company, such as Insulet. The other thing I'll say, and I'll speak for my background, I came primarily banking and other industries where through a third party, you enable something at the end. The one thing that I love is just seeing the direct impact we have with our end customers and helping people with diabetes.

And you've been in the role a little over a year now. Maybe just talk to us about what your priorities and how you see those kind of evolving over the next 6 to 12 months?

Yes. So the priorities for Insulet and for finance inside of Insulet, are really in the three main areas. We're here to help the people with diabetes. So that innovation road map is incredibly important. Second is the markets that we serve and the expansion. We talked about U.S. type 1, type 2 international, all of that. And third is really about the people at the end of the day, it is the people and the culture of the company, and we have a really good one, and we want to keep it that way.

And how -- as you get bigger, how do you ensure that you maintain that growth agility while trying to manage more systems, more processes, more countries, et cetera?

Yes. It's a really good challenge. We're a 25-year young company. So I would say many companies when you think about making a change, they have to make a change to their old systems and then build the new. Here, we're more on the building the new. And I think what Ashley and I bring to the organization is we've seen some of these large systems operate. So we want to design them to the better way so that they can have that agility and flexibility as we move forward.

Maybe we can sort of toggle over to the business here. One of the questions that we get from investors pretty frequently on the type 2 opportunity is you have had the indication since August of last year. You've seen a very nice pickup, but how do we evaluate whether what we're seeing is just like this is the new thing and it's going to roll over after kind of a 12-month period, there's sort of a [indiscernible] type 2s that are very addressable with pumps beyond the MDIs and that's just kind of like a flash in the pan. So what are some of the things -- how would you respond to that? And then what are some of the KPIs that you're monitoring to give you confidence in the outlook?

So I'll start by saying it's a huge market, 2.5 million people in the U.S. only, let's call it, 5% penetrated. It's a huge market. And we have the winning product that overtook type 1 to bring people from MDI. So we feel very good and confident with that. In terms of proof points, we look at a few things. Of course, new customer starts, but that's almost like an output, right? But we look at our sales force and the coverage that we have. So we've talked about the fact that we expanded our sales force. And in that expansion before the expansion, we covered about 30% of that 2.5 million people, being feet on the street. Now with expansion, we cover about 40%. The efficiency of our direct-to-consumer advertising is getting better. We're seeing that as we get inside sales calls and in those conversions. And the third thing that I would note is we also talked about the number of unique prescribers. That number grew 25,000 in the U.S. that was a 20% growth from a year ago. So we feel those proof points are out there. And we're making good in that trajectory. We want to see more of that before we lean in any stronger, whether it's with our guidance or with other investments that we'll be putting out there to capitalize on this huge opportunity.

And when you say cover 30%, now 40% of that population, is that -- how is that defined?

Yes. So we've made an assessment as to where the 2.5 million people, what doctors are serving those, and what -- it's very obvious is the type 1 population is mainly seen at ENDOs. But there's a piece of that 2.5 million that also gets seen on ENDOs and by reverse, there's a piece that gets seen at primary care physicians, both smaller amount of type 1s, bigger amount of type 2s. So as we expand in those PCPs, we look for two key indicators. We look for high prescription of CGMs and high prescriptions of rapid-acting insulin. When you have those, that's the pecking order that we start prioritizing in that sales force expansion, and that's where you tend to find those patients.

And one of the other things that we've tried to figure out on the type 2s, of the 2.5 million, what's the serviceable population? Because one of the other dynamics, I think, with the type 2 that is unique from the type 1s is the socioeconomic and demographic dynamics at play? So how does that factor into the analysis of where to put feet on the street?

Yes, it's a very interesting question. And I'll bring back for a second to our SECURE-T2D study, where we had a wide range of social demographic classes. So the good thing is that it does prove that the ease of use and all of the attributes that our product has served across the board. Then it becomes an economic question. And we have some statistics that I just want to share here is our product from an out-of-pocket to that end customer in the United States, the vast majority pays about $30 a month. So it's about $1 a day. Now again, that could be difficult affordability for some, understood. There's about 1/3 that pays no co-pay, nothing. So we continue to work through our health plans, through the PBMs and everything to make this more affordable. The last thing that I'll mention is and we try to be selective on this, but we do have co-pay programs. So we try to make that be as reachable as possible.

Okay. That's very helpful. And then I think when you -- you talked about kind of measuring success of some of these investments before going further? How long a measurement period is that normally? And like what would you consider to be success?

Yes. So we have a very disciplined approach, whether it's direct-to-consumer, whether it's our sampling program. In terms of expectations, we have number of clicks, number of reach, number of conversions, so on and so forth. So we look at all of those things. We try to give it -- I mean, by the time the customer expresses an interest all the way to being trained and put on product, there's a little bit of a lag there. So I would say -- I mean, there's no perfect formula. Each program might be different, but a good 6 months or so. And then -- some of them, we also want to see that retention and make sure that, that's also there. So there's phases of measurements that we have.

It's interesting that you bring up retention, because this is another question we get very frequently. And I would say more on the other side than on the pump side with respect to the type 2s. But there's a question out there about will you see as durable utilization and retention with that population as you see with more obviously with the type 1s. What have you observed so far?

So great question. We walked in understanding these populations will behave differently. There's a lot of road that the CGMs have paved in helping us learn and understand that. So what we're seeing right now is pretty much in line with what we were expecting. But to be clear, I mean, we are anticipating the type 1 and the type 2 to behave differently.

And what were you expecting?

So it's early days. But we are expecting -- and we don't share the specific numbers, but we expect there to be higher attrition in the type 2. We expect utilization to at times be a little more spotty because the pancreatic function of the type 2 still has some insulin production and so on. But at the end, what has been proven through our studies is that people who stay on product actually stay in range longer and have the desired outcomes that the health care system wants, which is the prevention of hospitalizations, the remaining organs to be functioning better over the long term. So it's a lot of education and a lot of market development.

I have to push a little, but can you give us -- how about any sense on magnitude of difference in utilization or retention between the type 1s and type 2s? Is this material differences? Like how -- any scaling or framing that you could provide would be helpful.

Again, it's early days. This is part of the data that we're collecting. And when you look at the type 2 growth that we're having, we're still in the early time. So once we get a little bit more, we'll be out there sharing.

Okay. So you -- that is data that you will at some point?

We will -- I think it's important, and we know they're different, and we're just in the process of education.

Okay. So too early to tell, it would be a fair way to conclude that. Okay. And what are some of the things that you're doing to maximize retention in the type 2s?

That's great. Listen, today, I hope you saw the press release, it hit a few...

This morning, yes.

Yes. So iOS G7 is out in full market release. That follows our iOS for G6 full market release that happened in the fourth quarter. Those are examples of ways we want to drive that retention. We want to make it ease of use for our customers. There's a customs food feature in which you can say I'm eating similar to what I ate before, small, medium, large, those types of things. So we want to do all of those things. We actually want to be proactive when we see somebody come off our product for a period of time, reach out to them, understand what's happening. Is it a payment problem? Can we give you a co-pay card? So like we want to really help the people out there. So there are efforts, and we'll continue to assess and intensify them.

Okay. Maybe just sort of moving over to the financials and the business performance here. 1Q saw quite a bit of upside. And given kind of the recurring nature of the business once you get patients, they presumably continue to use the product. Is it right to think about the guidance raise for the year flowing through the Q1 upside?

Yes. So that's exactly what we did. What we did is we let the upside of 1Q drop through and also the new customer starts that we saw, we let that drop through. What we talked about is we set guidance with the full intent to hit it, and we want to see more proof points. I mean, we're only in the first quarter. We're really only two quarters into type 2 as well. We had great performance in international, but we'll lean in heavier as the year progresses here, but we just wanted to see a bit more proof points.

So effectively, looking at that another way, your assumptions that you had previously in guidance for 2Q to 4Q on new patient starts and other metrics not related to the Q1 flow-through were unchanged?

Correct.

Okay. Maybe we can just break that down a little bit into just the different operating regions. So for the U.S., your guidance does seem to imply a pretty significant slowdown from first half to second half. What are some of the factors that influence that?

Yes. So as I said, it's really about seeing a bit more proof points. We do feel we have a lot of tailwinds here and it's just early in the year.

Is there anything around rebates or other kind of one-off factors that we need to consider either quarterly phasing or that may have influenced Q1?

Yes. So Q1 had two dynamics that needs to be taken into account that made the quarter look even more favorable. So you have to adjust for the stocking dynamic from first quarter of 2024 associated with the implementation of our SAP system. And then that was very well vetted and talked about. And the second one, which is a bit newer that I indicated during the first earnings call was we did see 450 basis points of a headwind in the first quarter of 2025 compared to 2024 related to an estimation change we've made for estimating rebates. This is specific to the U.S. So now we're estimating rebates on a weighted average rebate rate for the full year, very similar to what the industry does, instead of before where we were waiting to receive information from the PBM. So it's just a better estimation. And hopefully, what that will do is it will give you more clarity of our volume drivers instead of having that price in the middle. And the last thing that I want to mention is it's neutral to the year in our guidance. So those 450 basis points that we saw in the first quarter will come back ratably over the next 3 quarters.

And just like mechanically, because rebates always become a little tricky. So -- and just rebates are -- this is -- the difference between gross to net on pricing basically.

Pretty much, yes.

So should we then think about your volume growth and revenue growth being roughly equal going forward? Is that the idea to try to smooth out the difference between new patient starts and overall utilization growth with revenue?

Correct. I mean it's really taking out some noise that was not intended to be there.

Okay. Got it. Maybe we can talk internationally that is picking up momentum for you. Maybe just sort of take a step back and just sort of frame the OUS strategy. And if I look at the number of -- why don't you start there, and I'll follow up with some other questions.

Listen, we're super excited with our international -- with the overall growth of Insulet and the international growth has been amazing. We grew 36% in the first quarter, which indicates a few things, and I'll touch on them in a second here. But when you think of the international growth, I think about it in three ways. First is new markets where we're launching Omnipod 5. After we launch in the new markets, then you have a lot of cultivation and things like that. But we also have had further releases of sensors as well. So you launch in the new market, you put out their sensors and other things into those markets. And then the third thing is we then look out and say, are there more markets we should be? So when you look at the history of our international is it started with U.K. and Germany about 2 years ago. U.K. and Germany are still growing. It's more -- it's very durable growth, but we put out more sensors, and then we actually -- international, on average, is only 20% penetrated, and we are the most prescribed amongst new-to-pump in the international -- across Europe. So then you get to the next layer here. And then we went with France and Netherlands kind of summer of last year. And that is also going through that same growth. And because of our recurring revenue model, this growth kind of overlap. And then early this year, we launched in 9 more markets, which together are about the size of the U.K. and Germany. And then we have later on this year or early next year, we haven't announced the exact timing, we have that in the Middle East. So when you put all of that together, you can see here kind of those layers of durable growth into the future. So we're very excited by our international agenda.

And in international, it gets harder, right? You make the comment that the 9 countries represent the size of the U.K. and Germany combined. Are you going direct in all those markets? What is the commercial strategy?

Yes. So we launched in some of our direct markets first, some of the larger markets where we have -- where we see that bigger opportunity. A lot of the markets we launched here in the first quarter are indirect markets, so distributor markets. And I do want to call out, it's important, thanks for the reminder, that about 5% to 6% of our growth that I mentioned here in the first quarter, so we grew 36%, it represents the distributors filling up their distribution networks. So meaning think about that as kind of nonrecurring. There could be some more of that happening in -- as their different markets launch at different, but there's an element of filling their distribution networks as well.

Okay. And that's contemplated in the guidance for the balance of the year.

Correct.

And sustaining 30% is a big number internationally, even when you adjust for the stocking dynamic, continuing that or sustaining that requires both same -- sort of same country growth and adding new countries? Like what's the breakdown is sort of like same country growth versus the criticality of adding new markets?

Yes. So for 2025, we've been pretty clear in terms of the countries that we're in, and it's really expanding that offering now remaining to the Middle East, whether it might happen late this year or early next year. As you look into the out-years and we haven't been specific in our journey map there, there will be getting into more countries as well. Now keep in mind, on average, 20% penetrated. So there's still a lot of room and opportunity, and our market access team is constantly working on securing more funding for the asset class and those different types of things as that penetration does anticipate further growth.

Okay. And how do you think about qualifying markets? Like do you wait to have visibility into reimbursement? Because you would think like Australia, New Zealand, Japan represent like big populations. But what is sort of like the qualification process for identifying which markets you want to go to?

Yes. So it's exactly what you mentioned, right? So we need to make sure there is good CGM presence, and that actually tells us two things. That tells us that there's a lot of people with diabetes as well as it tells us that there's reimbursement in those markets. Of course, we look at data on rapid-acting insulin and those types of things. So once you put all of that together, then we have a sequence in which markets we will go to, and of course, then it's a question, do we go direct or do we go through distributors. But all of that is part of that road map. Keep in mind, we're only in 25 markets today.

Okay. And maybe just sort of wrapping the top line discussion together, I just want to make sure we kind of pull together what you're saying, and that I've kind of captured it accurately. So first quarter, very happy with performance. There were some factors in there that helped the overall results, positive being the potential inventory stocking for some of those distributors. It sounds like the rebate dynamic was actually negative, though. So you have some headwinds and tailwinds in there. For the rest of the year, in a scenario where some of the type 2 dynamics persisted from Q1, you would see upside relative to your guidance? And in a scenario where you saw a moderation, you would hit your guidance?

You've hit it on the nail. Absolutely.

And I just want to clarify something you said because someone in here on the webcast is going to message me and say, Ana said, the goal is to hit the guidance. Of course, is the goal to hit the guidance or exceed the guidance?

I would say it's both. I mean, we set it with our best available information and the intention to hit, and you've seen our history and we intend that to continue.

Okay. Excellent. Maybe we could toggle over to the P&L here. I mean the gross margin trajectory of the business has been pretty extraordinary and you're bridging over 70% gross margin. You did take up your outlook for the year. Maybe help us understand what are the factors contributing to the incremental gross margin performance?

No, it's great. We're super excited. First quarter gross margin, 71.9%. Team is really doing a phenomenal job. A couple of other things that are going really well for us is getting those efficiencies, the scale that we have, the production of tens and millions on the growth we've had, give us a lot of room for our supplier negotiations. Those have done incredibly well. The other thing I would say is the team is operating whether you call it levels of scrap, like the efficiencies that we're attaining are world-class. There will always be variability amongst the quarters, just let's be clear. It's just the nature of the business, but they really had a phenomenal first quarter. The other thing to mention is we've been working a lot around tariffs, of course. And we talked about at the time when we gave our earnings result in early May with the information we had at that moment, we estimated the tariff impact to be small, to be about 50 basis points for the full year. And that because of the strength we're seeing in our manufacturing operations, we leaned in and actually guidance to 71% and absorbed those 50 basis points of the tariffs.

Do we have tariffs or not?

It depends on which day you're in the news. But in addition to that, Insulet as others in the industry do benefit from some of the tariff exemptions that are out there. So overall, our impact would be smaller. And then based on the day, we will continue to update you guys as we learn more.

And where was -- just remind us the majority of that 50 basis point impact coming from?

It's mainly coming from China and in some elements there also some of our component parts that make manufacturing over -- the component part.

The raw material.

Raw material.

Raw material. Okay. And then at the same time, while you did raise gross margin guidance, you kept the 16.5% operating margin target in place. Help us think through where some of those incremental investments are going?

Great. So I'll start with 16.5% operating margin is a growth of 160 basis points from prior year. We are committed to margin expansion of at least 100 basis points a year. What we want to do is take a moment and look at our investments mainly around our commercial efforts. We believe we're uniquely positioned, both in the U.S. and in international to relook and lean in to see if there's anything we can do to actually go faster within the same framework of our investment philosophy. So that's all we're doing. We are working hard to make sure we can capitalize on this huge opportunity ahead of us.

And when you kind of made the decision to sort of reinvest some of the upside, how long does it take to sort of open up budgets, open hiring? You obviously have to open more headcount to go through that process. How long does it take to really execute on an expanded budget offering?

Yes, you described exactly some of the mechanics that need to happen. And it depends on how it gets deployed. Usually, if it's direct-to-consumer, the spending of that can happen a little bit faster. There's a lag to seeing the impact. There's a cultivation period and all of those things. So I would say, if you do sales force expansion, which we just did once, so we're not announcing anything or anything like that, then that takes a bit longer because you have to hire people. There's also sampling because of our unique form factor that we have. We can do sampling at doctors' offices, and we've seen some really interesting returns out of that. So we're -- some of them are faster, some are a little slower, but I just gave you a little bit of a flavor between some of the alternatives.

Okay. I know we're coming up on ADA. Maybe give us a preview of what investors should be looking for? And what sessions of interest or data, anything that you want to highlight going into the conference?

Great. Yes, we're only a few weeks away. We're going to be sharing more information about subsets of our SECURE-T2D data that we showcased last year. There's a lot more learnings and things we've analyzed with that data. And earlier this year, we were at ATTD and we shared results of our RADIANT study. And again, we've been able to go deeper into that analysis. So you'll be hearing a lot more from those areas of studies as we continue to build the clinical evidence for further progression of our algorithms and other things that we're working on.

Okay. And then lastly, you did take some steps on the capital structure here to term out some convertible debt and then upsize and put some more debt on the balance sheet, like what was the intention there? And what -- how do you plan to use this increased financial flexibility?

Great. Excellent. So listen, we're very excited by having that increased financial flexibility and doing it at a reduced weighted average cost of capital. That's really the intent here. We're uniquely positioned versus others in the market, generating our own free cash flow. And that gives us the ability to create a balance sheet that looks more like a grown-up balance sheet and also helps us have that flexibility, as you said, into the future.

And would you contextualize that in the same vein of some of the future trajectory of Insulet and the leadership changes we talked about earlier, this is all about, not -- I don't think we want to use the word maturing, but in moving Insulet to from the $1 billion to $2 billion company, I think you've talked about $2 billion to $6 billion as the potential opportunity.

Agreed. I mean this is really around being a more mature. We're 25 years young, and we now produce the balance sheet, the free cash flow to sustain ourselves, and that's where we are in that journey, and we're very excited by the position that we're in. The markets have been open for us. We had great transactions in the market, and we're very excited.

We shouldn't view it as your leading indicator on M&A or other. This is really allowing you to continue to run the playbook.

Correct, allowing us to continue to reinvest in ourselves. That's where we see the best returns, having that flexibility in the balance sheet. Those are really the key priorities.

And then I guess we'll close with the analyst meeting. I mean -- I think everyone understands that 3 months after someone joins the company, it doesn't make a ton of sense to host an analyst meeting, doesn't allow that individual to have ownership over. It probably takes that long to prepare for the meeting, if not longer based on what I can imagine your internal teams are doing. But when do you think we'll have an analyst meeting back on the calendar and just sort of make sure this is a delay, not sort of permanent deferral?

Correct. It's just a delay. We're working hard to align calendars to not only for Ashley to have time to do all the listening tours and all the things she's working on to put her stamp into the strategy. I do want to reiterate nothing has changed in terms of our strategy. More to come. We look to -- we're working calendars. We look to see if we can squeeze anything this year. I'm not too sure, maybe if not towards the early part of next year. So it's really a postponement. It's not a permanent deferral or anything like that.

Excellent. Well, I think with that, we're almost out of time. So maybe I'll turn it back to you for any kind of closing thoughts or remarks and then wrap up.

Great. Thank you, David. It's been wonderful. Thank you all for participating and for your interest in Insulet. I firmly believe Insulet is uniquely positioned in a category of one with a product that overtook type 1 to be out there to really capitalize on the U.S. type 2 market and the global market opportunities. We're very excited with our innovation journey and the road map ahead, the free cash flow production that we have and the sustainability of Insulet into the future and ultimately helping the millions of people with diabetes out there. So thank you very much, and thanks for your interest.

Excellent. Thank you, Ana.

Thank you.