Insulet Corporation ($PODD)

Good morning, everybody. Travis Steed, the Bank of America medtech analyst. Next up, we are glad to have Insulet here. We have Flavia Pease, Chief Financial Officer. Welcome.

Thank you, Travis. Great to be here. Thank you all for your interest in Insulet. Looking forward to the chat.

Great. Thank you.

Maybe we'll start with seasonality in Q1. The deductibles getting reset. It's not really a new dynamic and other companies haven't called it out. So why was it kind of stronger than what you've kind of seen historically in Q1?

Yes. To your point, deductibles reset every year, and there's normal seasonality in the category. We saw that in 2023 and in 2024. Last year was a little masked. We didn't see the seasonality as we were in the very early stages of our type 2 launch. And so this year, not only we didn't have that tailwind, but it was more pronounced than historical levels. And what we believe is happening with the category is, even though maybe others didn't, let's say, call out specifically. When we look at other diabetes companies that go through the pharmacy, we did see seasonality in their scripts in the first quarter vis-a-vis the fourth quarter. When we look at GLP-1s, when we look at CGMs, when we look at insulin, they all saw the same level of, let's say, sequential step down as we saw in our business. I think more importantly, though, what we did see is it picked up nicely through the quarter and into April. And so when we take a step back and we try to unpack what happened, there has been some changes in insurance constructs and coverage, especially with Medicare co-pays and coinsurances have increased. And so what we believe happened is as you started the year, people took longer to hit their deductibles and have higher deductibles that they had to work through. And so once that happened, we saw the NCS pick up to more normalized levels again. I think the other important thing and why we, again, have a conviction and a belief that, that was seasonality, this was really only in new patient starts. When you look at our installed base, there was sequential growth year-over-year -- excuse me, sequential growth quarter-over-quarter. So it's really a dynamic of those new customer starts looking into converting from MDI into AID. We believe that there was a bit of a disproportionate impact of these changes in plans. The other thing is as our business continues to grow in type 2, that's a more Medicare exposed population. And some of these changes in plans were even more pronounced in the Medicare versus commercial plans.

Okay. That's helpful. U.S. revenue guide for Q2, 18% to 20% was a little bit below what the Street was modeling even adjusting for some of the headwinds that -- what timing headwinds that you talked about. Help us understand kind of the improving sequential trends in the quarter and kind of gives you the kind of the Q2 factors?

Yes. So first -- the first quarter performance in the U.S. and more broadly in the company was very, very strong. Growth in the U.S. was 28%. To your point, there was an impact of some order timing between Q1 and Q2. So a more normalized growth was about $10 million, about 200 basis points. So think of it more of a 26% normalized growth. So that's the first thing that when you look at it, Q2 versus Q1. Second thing is comps. Last year, the second quarter was the largest quarter in terms of growth for us. So we're comping a very high base. I think importantly also, as our business continues to grow, the percentage might be less, but more importantly, the dollars sequentially higher. So Q2, we're going to see another step-up in dollars in the U.S. vis-a-vis Q1, even if the growth rate is a little bit lower.

I think there's also people are looking at kind of the second half exit rate and kind of what that means for 2027.

Yes. I really want to spend a couple of minutes there because I think there's a lot of questions even as we've been here on the conference around that second half in the high teens? And what does that mean for 2027? Do you have concerns on the ability to deliver on our LRP guidance? So first, it's important to remind everybody, when we had our Investor Day last year and we provided the 20%, it's a CAGR, right? It's a CAGR for 3 years. And this year, we started with our guidance already above that 20%. The guidance was 20% to 22%. We just delivered strong results in Q1 and increased the guidance for the year to now 22% to 24%, is that right? Yes. No, 21% to 23%, so midpoint 22%. So we're already above the 20% that we had provided for the LRP. And what that means is, we believe the ability for us to deliver on that outlook is going to be driven by catalysts and specifically innovation that plays into continuing to attract people from MDI into AID, more so than a certain exit point in any quarter or any half year. I'd like us all to think about that is it's not linear. If you look even what has happened historically with Insulet, when we launched Omnipod 5, our growth in the U.S. went all the way to 40%, and then it came down. And then we launched into type 2 and the growth accelerated again. Last year, we almost delivered 30%. So it's really about the innovation catalysts that are going to continue to unlock the different levels of growth rate that you experience. And as you think about this year, next year and 2028 and how do we think about our innovation, let's say, marrying it up to the growth that is going to result. This year, we're launching Omnipod enhancements to our Omnipod 5 algorithm. We're connecting with the Libre 3 sensor, which is going to increase our serviceable market by in the U.S. alone, 550,000 people. And so that's all about continuing to enhance the position that we have in the market with the current installed base and continuing to attract people from MDI into AID. Next year, I'm sure we're going to talk about there's new competitors entering the tubeless portion of the market with products not, in our view, as differentiated as Omnipod, but maybe an evolution of their own offerings. So as they are coming into the market, we're going to be launching Omnipod 6. That is a new hardware with enhanced wearability, better connectivity and also our third-generation software update with better personalization, less bolusing, better outcomes. And so as competition comes into the market, we have innovation that is going to continue to allow us to sustain our leadership. And then into 2028, that's when we're going to launch our fully closed loop for type 2, which I love to talk a little bit more about that because we think about that innovation as another one of those big unlocks, similar to Omnipod 5 or similar to the launch of type 2. And that's really going to accelerate or accelerate above the normal our growth rate. That's how we think about it. So yes, this second half, it's not going to be higher than the first half, if you just do the squeeze math. I wouldn't read too much into it in the sense of having concerns about the durability of our growth or the confidence and conviction of our ability to deliver on that 20% CAGR.

And the highlight of it being a CAGR and not linear, that's more a reflection of the kind of the second half of this year, right, not really a '27?

Correct. I think this year -- if you think about this year, the full year is already above that 20%, right? And first half, second half of this year is different. And then next year might be below the 20% and then the year after might be above again meaningfully. And so I just -- I think it's important in medtech especially, and we've seen this, obviously, in our category and in other categories. Innovation does move the needle. And I think that's what trying to make sure that people connect the dots.

Great. That's helpful. You mentioned expanding the sales force, too. Is that something you're doing ahead of the competition? And kind of what you see about the commercial sales force expansion on the revenue?

Yes. We are expanding our sales force is the second expansion in the last 12 months, actually. And we are doing it less from preparing for competition and more from a, I'll say, a position of strength of continuing to invest in the category and driving that category penetration. This is one of the most important things, I think, to just remind everybody. AID growth is driven by moving people from the sidelines of MDI into AID therapy. 80% of the NCS are coming from MDI, not from me taking share from MiniMed or us taking share from Tandem or vice versa. So in doing that, we need to continue having the ability to drive the category, to drive that penetration. And that's where -- that's the primary impetus for our sales force expansion. It is not in anticipation or to defend against competitive entrants. In fact, the fact that other pump companies are going to continue talking about AID, continuing to talk about the benefits of going from MDI. It's an opportunity for the category to continue expanding. And then within that category for the tubeless portion of the category to become disproportionate as other people try to have kind of patch-like products. Maybe the last thing to talk about as we think about the commercial expansion. Why do we have conviction that it is the right thing to do from a returns perspective? Why isn't it diminishing in terms of cost to acquire? If you think about rapid acting insulin prescribing -- prescribers in the U.S., there's about 450,000 of those. About 100,000 of them are the ones that really matter, the ones that are like 80-20, 80% of the volume of prescriptions are concentrated on 100,000 physicians. 40% of those have prescribed an AID device in the last year. So they are familiar with AID therapy. They believed in it. They are comfortable with it. We only call on 25% of that 40%. And our sales force expansion now is going to allow us to go from 25% to 30%. So there's another 1,500 physicians that we're going to now be able to call on that see another 150,000 people that are eligible for AID therapy. So the impetus or the rationale for the sales force expansion is to continue to be able to increase our reach and frequency and continue to drive the category as we have done for the last 5 years and growing above the category and bringing people from MDI into AID.

That's helpful. And then pricing in pharmacy as more competitors move into the pharmacy channel, can you help us understand why that's not a risk and what you're seeing?

Yes. So we pioneered the pharmacy channel almost 10 years ago and made it really a lot easier for people to start on therapy and for prescribers to get their patients on therapy. As other competitors start entering the channel, whether it's [ Twist ] last year, Tandem announcing that they're going to move some of their installed base. What we've seen is, I would say, disciplined behavior as they enter the channel. Where they're setting up their WACC, which is the -- think of it as the price -- the list price is consistent with where our WACC is slightly discounted for a, I would call it, a less differentiated product, which makes sense. And then the level of discounting that we've seen from their disclosures, it's consistent with the discounting and the rebating of the category. So we have not seen any behavior that would suggest significant discounting. Our price was actually positive in the first quarter, as we said, and we expect it to continue. And I think importantly, Travis, as they entered, it's important to think about how the dynamics happen in the channel. First and foremost, we continue to be the driver of volume into the category -- into that channel. We win in the end at the doctor's offices. We are winning 2/3 of the prescribing that is happening. We're the #1 most requested and most prescribed AID system. And as long as we continue to do that, we're going to continue being the primary driver of volume into that channel. And I think our innovation and what I just spoke about is what gives us the confidence that we're going to continue winning at the physicians' offices. And then in addition to that, as they enter the channel, they're entering in a place where we are multiples bigger than they are. So if you think about the dynamics and how you get into formulary and trying to displace competition, it would be very difficult to sort of buy their way to disadvantage us if that makes sense. Now of course, they have a good tailwind as they change from their DME channel into the pharmacy channel. Some of the same benefit we saw when we did that. But other than that, what we have seen in the channel so far, it's a very -- as we expected, disciplined way to enter pharmacy.

And then on the competitors launching patch pump in 2027, starting to close the gap on form factor, what are you trying to do to continue your win rate of new patients?

Yes. So I think the fact that they're trying to come into where we have demonstrated is where patients and physicians with the type of product that wins, which is a fully disposable nonpriming, you don't have to charge automatically inserted device. It's a little bit of, I would say, a reflection that the jury has stated that the form factor that we offer is the preferred most desirable offering in the marketplace. So I think the folks finally decided to acknowledge that they need to try to close the gap as close as they can with us. And in trying to do that, one is, from what we see, the offering is not -- as they try to move closer, it's not closing the gap fully. And as they try to get closer to us, we continue to distance ourselves from even our current offering today. So we're doing already enhancements in Omnipod 5 with the 100 set point as well as changes into the algorithm to keep people in automated mode longer. In our limited market release, the feedback has been really positive, and we have shown in studies that by just changing the 100 set point, you can get a 5-point enhancement in time and range. And so even at the current chassis, if you will, hardware with an enhanced algorithm, we are already improving. Next year, we're going to launch Omnipod 6. And at ADA, we're going to review our STRIVE data. And Omnipod 6 is both enhanced hardware and another software algorithm enhancement. It's going to drive more personalization, as I said. It's going to require less boluses, better outcomes. And so as they're, let's say, trying to close the gap, we keep advancing our own offerings and our innovation to ensure that, that separation remains in the marketplace. And we feel very, very confident that our pipeline is differentiated and is going to continue to allow us to win.

On the fully closed loop, you're closing the loop, I think 2028. Other companies are trying to do the same thing. What makes your algorithm continue to get better and differentiate itself?

Yes. I'm glad you asked the question because I think, first, it would be helpful to maybe talk a little bit about what fully closed loop really means. There was a lot of discussion at ATTD, which is a diabetes conference that just happened in Europe, about other people speaking to what they call fully closed loop systems and fully closed loop in type 1. We get questions, why are you doing type 2 only? Are you late? Why don't you have an offering for type 1? And so the first thing that I would say is what others are calling fully closed loop, we believe actually enhanced bolus optional, but still hybrid loop system -- closed-loop systems, which means you still have the ability to bolus. You still have to have settings before you start therapy, which is what we're going to be offering also with Omnipod 6. So we see our innovation on hybrid closed-loop systems continuing to be competitive as to what other people are calling fully closed-loop systems. Now our type 2 fully closed-loop system that will launch in 2028, it's truly different. What I mean by that is there is no setting. Physicians don't have to tweak with the device before a patient can start. They write a prescription, the person with diabetes or patient goes to the pharmacy, picks up the device, starts on their own. They can get trained on their phone on their homes. And then they put the device on. There's no meal announcements. There's no bolusing. The device doesn't even allow for bolusing. And so think of it as -- we use this analogy of a Waymo versus a Tesla. It's like you do not drive at all as opposed to kind of drive assist. And the reason why this is important is, especially for the type 2 population, 70% of the folks that have type 2 that basal and bolus, they are seen by PCPs, primary care physicians. Primary care physicians, they -- going back to our expansion of the sales force and what it's going to take to continue to unlock that penetration. They are not going to start type 2s on pumps if they have to do a heavy lift to set them up. They are not comfortable with the technology. They are not going to know to do all those settings. And so having a device that is as easy as CGM to onboard is truly what's going to unlock that big TAM, that total addressable market, to become a serviceable market to allow us to actually have prescribers, be comfortable prescribing and type 2s being easy enough for them to onboard. So that's why we think that's another sort of S-curve inflection point when we launch that truly differentiated product. And just as a reminder, we presented some data from our feasibility study at ATTD on the fully closed loop. It showed a time in range increase of 24 points from starting an MDI, getting people to time in range of 68%, which is truly compelling for very, very little effort and interaction.

On the LRP, you call it 20% CAGR, but Omnipod 6 is '27, fully closed loop is '28. How should we think about the cadence of that 20% CAGR?

Yes, that's what I was talking about a little bit. It's not linear, right? You asked me about the exit of this year in the second half. So if it's in the high teens, what does that mean for 2027? It means that maybe 2027 is below the 20%, and then it reaccelerates in 2028 as we launch additional innovation. And that, again, is consistent with what we've seen -- you've seen us do in this space with Omnipod 5 launch, really accelerating growth, a little bit of a slowdown in 2024, reaccelerating in type 2. But I think when you look over the last 10 years, we have had 20% or better growth for 10 years in a row. And in addition to the innovation that we are delivering, it's really the fact that we are still in a very underpenetrated category. And the fact that, that innovation does allow the category to be unlocked. It does allow people to move from MDI into AID. And that has been what the history has shown and what we expect to continue.

Okay. Helpful. On -- I think earlier, I meant to ask about retention because there was another topic on the call. So if we can just touch on that, too.

Yes. We talked a little bit about that and retention was said it differently attrition. And as we launched into type 2 last year, we had a hypothesis that attrition for type 2 was going to be a little bit higher than type 1 and we are seeing that happen. I think importantly, it's not different than what we expected. It's playing out pretty much as we expected. And so as our installed base of type 2 grows, attrition could become higher for overall. But I think two important things. One is we're not standing still, right? As we see this attrition in type 2 being higher than in type 1, we are making a lot of -- we're putting in place several interventions to help minimize the impact of attrition in type 2. What we have seen is it's more pronounced in the first 90 days. It's when they're getting used to the device for the first time. They are doing the first pod change. They're learning how to use it. And we have and we're using a lot of AI insights to help have a more proactive outreach to that type 2 population, to reach them as they are getting these critical moments. And we are seeing some really good traction in using predictive tools to interject or interfere before they attrit and then remediate that or hold to them and not let them attrit. And so what we have had with some pilots late last year is really substantiated that the value proposition of those interventions, and we're amping those into 2025 -- 2026, excuse me. The other thing also is, even as type 2 in the U.S. has slightly higher attrition than type 1 in the U.S., we're actually seeing type 1 internationally get a lot better. And that is a result of moving from DASH into Omnipod 5 and seeing that stickiness of Omnipod 5 really delivering. And so for total company, as we look at attrition or retention inversely, it's actually very stable. It was stable last year and what we're seeing is stability again in 2026.

On margin expansion, 100 basis points a year, is just maybe kind of the levers to get to the 100 basis points? Is there upside to that? Is it more in gross margin or OpEx?

So we have what I would say or describe as a very compelling financial algorithm. When you're growing 20%, then you have best-in-class gross margins in the industry of above 70%, it puts us in a great position to be able to do both, to deliver compelling margin expansion of 100 basis points per year as we guided and continue to make meaningful investments. To your point, where is the expansion is going to come from. We expect gross margin to continue to moderately increase even now above 70%. And with the top line growing 20%, you can get a lot of margin expansion even as you -- this quarter, we grew R&D 50%, and we still deliver compelling margin expansion. So that algorithm works really well when you have strong top line, compelling gross margin, and it allows you to continue investing to drive that top line and deliver that margin expansion and free cash flow at a very compelling pace.

I wanted to kind of go back and touch on the U.S. new patient starts. We are estimating they were up high single digits year-over-year, which is sequentially decline low double digits, which slowed down in the year-over-year growth rate. Just understanding kind of what drove that slowdown in Q1 on new patient starts? And then how to think about new starts in Q2, 3 and 4 this year?

So as we talk -- we started the discussion talking a little bit about that seasonality. So that is, to your point, the sequential decline in new patient starts. But to your point, still high single-digit growth year-over-year in the U.S., very strong growth in type 2 in the U.S. year-over-year, a little bit flattish to down in type 1. And then internationally, still very compelling growth year-over-year and sequentially. So the seasonality that we talked about was very much a U.S. phenomenon. And so that puts us in a really good position. Year-over-year growth in NCS for total company was still very healthy. And we think as the seasonality doesn't continue into Q2, that we're going to go back to continued strong growth year-over-year and accelerated NCS through the year.

And type 2 new starts specifically, I think we were pretty similar down quarter-over-quarter, but a little more seasonality, how should we think about type 2, especially as you face tougher comps?

Yes. Type 2, to your point, was maybe a little bit more seasonal in terms of sequential decline versus type 1 in the U.S. And that's a little bit of that discussion we had on Medicare. Type 2 population is even more indexed, if you will, on the Medicare channel. And in Type 2 year-over-year, we saw a very, very strong growth. So if you think about it, last year was the first year of our type 2 indication in earnest. And on that high basis of growth last year, we still deliver very compelling growth. So we feel really good about the type 2 continuation as a segment and source of growth in NCS for us going forward.

And then internationally, just touch on how you're balancing kind of investments in the U.S. versus internationally and how you think about OUS growth?

And I'm glad you asked about that because I think a lot of times, people don't give credit to international. It's all about the U.S. And one, our international business is doing incredibly well, third quarter of above 40% growth. Now some of that is price mix realization benefit, which will modulate as we continue to move our DASH installed base into Omnipod 5. We're about 65% through that. So there's still runway to get that price mix benefit realization. But the preponderance of the volume -- continues to be -- has been and will continue to be volume. And the business is very, very healthy. We continue to see even in the markets where we had launched the longest like the U.K., we had record new patient starts in the U.K. as NHS continues to expand, not just access but funding to get people into AID. We continue to see access gains in newer markets like Canada, where we have expansion of coverage in 2 provinces. We have new markets that we're going to enter, like Spain that we're going to launch later this year, Travis. So we feel really, really good about our performance internationally. And I think importantly, a lot of times, people don't give credit because maybe the market -- people think it's not as financially attractive. The margins that we have internationally are very healthy. And you saw us expand margins last year even as the growth internationally was higher than the growth in the U.S. So it shows that ability for us to expand margins even as we grow more outside of the U.S. than in the U.S.

All right. I think we're out of time. Thank you.

Thank you so much.