Insulet 4Q18 – Record sales of $165 million rise 26%; record net income of $9.9 million; Dash launch in next month in US pharmacies – February 25, 2019

Insulet reported 4Q18 results this afternoon in a call led by CEO Ms. Shacey Petrovic (her first as CEO) and CFO Mr. Mike Levitz (his last as CFO). See the key highlights below!

Financial and Business Highlights

1. Record sales of $165 million in 4Q18, rising 26% YOY; US sales rise 22% ($93 million), OUS sales up 54% YOY ($55 million)

Insulet Quarterly Sales – 2Q13-4Q18

Insulet Annual Sales – 2013-2018

Worldwide Sales

• Insulet reported record worldwide sales of $165 million in 4Q18, rising 26% YOY and 9% sequentially. This was the second straight quarter of record sales, breaking the prior record in 3Q18 ($151 million) and on a tough YOY comparison to 26% growth in 4Q17. The US and OUS businesses were nearly evenly split, supplying 46% and 54% of the quarter’s growth, respectively. Worldwide sales exceeded the upper-end of guidance by $1 million ($159-$164 million), as we’ve come to expect from this team. It was especially impressive to see two consecutive quarters with both record sales and record profitability (see below). Ms. Petrovic noted that Q4 was a “great indication of the power of market access,” given expansion in Medicare and Medicaid, plus direct access with UHC.

• FY2018 worldwide sales totaled $564 million, rising 22% YOY and exceeding the top-end of guidance by $1 million. This also came on a tough comparison to 26% growth in 2017. As the chart above shows, this business has delivered remarkably consistent growth for the past three years following a challenging 2015. As the base of sales has grown, however, the YOY growth has softened – +39% in 2016, +26% in 2017, and +22% in 2018. For 2018, the US and OUS Omnipod businesses were a dead even split, each suppling 50% of the company’s growth. To get to the goal of $1 billion in sales by 2021, Insulet will need to grow >20% globally for the next three years straight – very doable, given the catalysts in the pipeline. Drug Delivery revenue totaled $68 million in 2018, declining 5%; this business has been relatively flat since 2016 ($65 million) and 2017 ($72 million), with a larger expected decline in 2019 (see guidance below).

US Sales

• Record US Omnipod 4Q18 sales of $93 million grew a strong 22% YOY and 14% sequentially. This marks three straight record US sales quarters, a great sign of momentum ahead of the upcoming Dash pharmacy launch within the next month (end of 1Q19). US Omnipod provided 46% of Insulet’s overall Q4 growth, a rise from 40% in 3Q18 – and quite notable considering the OUS tailwind of a ~50% pricing rise after assuming direct distribution in Europe. 4Q18 US sales came in $2 million over the guidance for $89.5-$91 million.

• FY2018 US Omnipod sales totaled $324 million, up 19% and actually accelerating from 18% growth in 2017. The US provided 50% of Insulet’s 2018 growth, its highest mark since 2012! US sales for 2018 came in $2.5 million over guidance ($320-$321.5 million).

OUS Sales

• International Omnipod reported record sales of $55 million in 4Q18, rising 54% YOY on a difficult comparison (+72% in 4Q17). This was a 10% sequential gain from the previous OUS record of $50 million in Omnipod sales (3Q18). OUS Omnipod hit the top-end of 4Q18 guidance ($52.5-$55 million), a good sign for visibility in the second quarter after Insulet took over Omnipod distribution from Ypsomed (July 1). The business is performing as management expected after inventory channel issues in 2Q18 (when OUS sales were just $29 million, +7% YOY).

• FY2018 OUS Omnipod sales totaled $172 million, rising 43% and softening slightly from 67% growth in 2017. OUS Omnipod provided 50% of Insulet’s 2018 growth, exactly in line with 2017. It was a transition year for this business, as Insulet took over distribution from Ypsomed and built a 120+ person European team – no small feat. Actual 2018 OUS sales hit the top-end of guidance for $169.5-$172 million.

• Ms. Petrovic quoted dQ&A data, saying Insulet’s Net Promotor Score is “#1 in Europe compared to all other insulin pumps …” – write Richard Wood for more details. This signals a very positive patient transition in the first six months of direct operations.

Global Patient Base

• Insulet will no longer give specific installed base numbers, but confirmed today 20%+ user growth was achieved in 2018 – adding roughly 30,000 users globally and taking Omnipod to roughly ~175,000 users globally. This breaks down to a US base of ~95,000 users and ~80,000 OUS users. (These are based on 2017 numbers and confirmed >20% base growth in 2018; no specific numbers were shared today.) Moving forward, the elimination of the upfront PDM cost with Dash means revenue growth will ultimately align with installed base growth; that said, this shift will take time to complete.

2. Most Profitable Quarter and Year in Insulet’s History: Net Income of $9.9 million in Q4, a 6x rise from 3Q18

In the second straight record quarter for profitability, Insulet reported net income of $9.9 million, up 6x from $1.7 million in 3Q18 (the first-ever net income quarter). Insulet also hit its goal to reach full-year profitability, reporting net income of $3.3 million for 2018, a remarkable rise from a net loss of $27 million in 2017. Gross margin held steady at 67% in 4Q18, in line with 67.5% in 3Q18 and up from 61% in 4Q17. The profit margin expansion was attributed to continued manufacturing/operational efficiencies, alongside going direct in Europe. Management repeatedly emphasized the 2021 goal of 70%+ gross margins is “exactly” on track, especially with highly automated US manufacturing set to come online this quarter and ramp over the course of 2019.

3. 2019 Guidance: Global Sales to Rise 17%-22% ($662-$687 million), including 15%-18% in the US

For 2019, Insulet expects global sales of $662-$687 million, rising 17%-22% YOY. This includes US Omnipod revenue of $373-$383 million (+15%-18%); International Omnipod sales of $235-$244 million (+37%-42% for the full-year, with much higher growth in 1H19 and mid-teens/low-20s growth in 2H19 on tougher comps); and Drug Delivery sales of $54-$60 million declining 12%-21%. For 1Q19, Insulet expects sales of $152 to $156 million, rising 23%-27% and down 5%-8% sequentially (seasonality). 1Q19 US Omnipod sales are expected to be $82-$84 million (+17%-19%); OUS Omnipod sales are expected to be $56-$57 million (+46%-50%); and Drug Delivery is expected to be flat YOY at $14-$15 million.

• Regarding US guidance, the shift to a free PDM will result in $6-$8 million in lost sales in 2019, offset by higher per-pod pricing in the pharmacy. The low-end of US guidance reflects not being able to cover the lost PDM revenue, though underlying business growth supports the higher level of sales. Of course, moving to the pharmacy could substantially raise volume and new patient adds, given simpler prescribing and elimination of upfront cost.

• OUS sales are expected to remain “consistent” in 2019, with “extraordinary growth in France” starting to moderate. Insulet will focus on existing markets in 2019, with guidance also reflecting some pricing pressures on the lower end. Dash is not targeted for an OUS launch until the end of 2019/early 2020.

4. Highly Automated US Manufacturing To Be Running “Shortly”

This was the first earnings call from Insulet’s new HQ – and highly automated manufacturing facility – in Acton, MA. Management said operations will be running “shortly,” with one US manufacturing line to provide “up to 50%” of the capacity of Insulet’s total China operation, but with up to 90% less headcount. A second US line is also being set up, meaning both US lines together will double current manufacturing capacity, help drive down costs, increase quality, and add redundancy. Ms. Petrovic called this out as “really important” and a “massive value driver,” following an analyst question: “Is there something we are missing?”

5. Last call for CFO Mike Levitz, as New CFO Wayde McMillan Starts on Friday

As discussed at JPM 2019, Wayde McMillan has been appointed Insulet’s new CFO starting this coming Friday. Mr. McMillan was briefly introduced on today’s call, though current CFO Mike Levitz shared financial prepared remarks and took Q&A. Mr. Levitz was extremely gracious in his remarks, thanking the team for Insulet’s tremendous progress over his four-year tenure as CFO. Mr. McMillan’s background is impressive: he most recently served as CFO of the Minimally Invasive Therapies Group at Medtronic, where he managed an $8 billion revenue business with greater than 20,000 employees and a global finance team. He played a critical role in integration efforts following Medtronic’s acquisition of Covidien in 2015, including reorganizing the Medtronic Group structure and developing a new global financial plan and strategy. We imagine Mr. McMillan may well be a very strong asset for the company, especially as it gains more global scale and manages direct operations OUS – we look forward to seeing his transition where he helps lead a dynamic, standalone diabetes business.

• This CFO change was fairly unexpected, though Ms. Petrovic shared the following explanation at JPM: “This is a change that Mike Levitz and I have been contemplating together for some time – especially given the future trajectory of the company as we move past $1 billion in sales in 2021. Mike will stay on to ensure a successful transition, including through the 10-K filing. It has been a tremendous four years, and Mike and I have known each other for the better part of two-and-a-half decades. It is time for Mike to move on, and this is a good move for both Insulet and Mike.”

Dash, Pharmacy Model, and Access Highlights

1. Dash US Launch By End of 1Q19; 120 million covered lives in pharmacy (~1/3 of Omnipod covered lives); “terrific” limited launch feedback

In line with JPM, Insulet expects to launch the new Bluetooth-enabled Dash PDM in US pharmacies by the end of 1Q19 (i.e., within the next month), offering Dash with no upfront cost. Insulet now has contracts for 120 million covered lives in the pharmacy, up from “over 100 million” as of last month. This represents “~1/3 of all Omnipod covered lives” in the US, meaning a very sizeable fraction of users may not have pharmacy access to Dash. Management was a vague about this, but said for the first time that “there will be some limitations in terms of reimbursement for Dash” – our interpretation was that those not under pharmacy contracts won’t be able to upgrade to Dash at launch. Management said “10%” of the business currently runs through the pharmacy, and the most it could be by the end of 2019 is ~30% (i.e., if every single person with coverage converted to Dash). We’re not sure if Insulet will allow people covered under DME to convert to Dash, or if they will have to wait until coverage is put in place.

• The six-month limited market release of Dash (has garnered “terrific” feedback: 95%-97% of patients feel the system is easier and more discreet, including 100% of MDI users who said it was “easy to use” and “intuitive.” A striking 95% of MDI users preferred Dash over their previous therapy – “tremendous feedback” and a great sign for Insulet’s target market.

• Continuing 3Q18 and JPM commentary, remarks emphasized the huge benefits of getting Omnipod into the pharmacy with a free PDM: no upfront cost for patients to get on the pump, more predictable out-of-pocket costs for patients (copays instead of deductibles), a true pay-as-you-go model for payers (less upfront risk), and simpler prescribing for healthcare providers. We asked at JPM about expected Omnipod Dash copays in the pharmacy, and Ms. Petrovic broadly agreed with our rough estimate of ~$50/month; in a later email, Insulet clarified that a remarkable >50% of copays were <$35. (We were surprised this was not mentioned today.) Using pump therapy for a predictable monthly price with no upfront cost is very exciting for expanding the market – and will enable many patients with fewer resources to start pump therapy.

• Dash was FDA cleared last June and represents Insulet’s biggest product launch since the second-generation pod.

2. Coverage for ~50% of Medicaid Lives, a “bigger opportunity” than Medicare; 1/3 of Medicare lives

Beyond Dash’s pending pharmacy launch, Insulet has expanded Medicaid access to ~50% of US covered lives and secured coverage for about one-third of all Medicare lives – both metrics rose from 3Q18, where Medicaid stood at 45% and Medicare stood at “almost one-third.” Ms. Petrovic emphasized that Medicaid is a “bigger opportunity” for Insulet, given the large pediatric population (a key Omnipod target market). Ahead of formal Medicare Part D coverage starting on January 1, 2019, Insulet has already helped “thousands of people” through the Medicare exception process – up from “over 1,000” as of 3Q18.

• At JPM, we learned that the pharmacy channel could simplify the path for type 2s to get on Omnipod, since it gets rid of the dreaded C-peptide requirement. This was not mentioned today, though in combination with Medicare Part D coverage, it could be a real advantage for Insulet over Medtronic and Tandem.

3. Dash International Launch Pushed Back to Late 2019/Early 2020; Working on Go-to-Market Strategy

An international launch of Dash is expected in late 2019/early 2020, back from the previous expectation to launch in 2H19. Insulet is evaluating the right go-to-market strategy, and it’s “not clear” it will launch with the same similar pharmacy model OUS. Dash does have a CE Mark, though it has not been publicized. At ATTD last week, Dash was on display in a corner of Insulet’s booth, though it was not heavily marketed in the booth and the reps were not even aware it has been CE Marked. Given the US launch is only happening next month – eight months after FDA clearance – waiting on the OUS launch is not too surprising.

Pipeline Highlights

1. Horizon Launch on track for 2H20 with Samsung Galaxy Phone Control; “Gearing Up” for Pivotal in 2019; “Expect to take advantage” of ACE Pump pathway

In line with JPM and 3Q18, an Omnipod Horizon hybrid closed loop launch is expected in 2H20 with direct smartphone control on Samsung Galaxy phones. Insulet is “gearing” up for pivotals, which are expected this year as of last month’s presentation. As a reminder, this device received FDA breakthrough device designation. (Medtronic’s next-gen MiniMed 780G also just received this designation.) Said Ms. Petrovic, “We are incredibly excited about progress on Horizon.” We learned at JPM that the direct smartphone control for Horizon will initially be available only for Samsung Galaxy Android phones, with Apple iOS to follow; integrating with Tidepool Loop gives Insulet a faster path to getting hybrid closed loop for Omnipod on Apple iOS. We’re not sure if Horizon will launch with an optional Dash-like PDM controller for non-Galaxy users; that possibility was not mentioned in 3Q18, at JPM, or today. We imagine for pediatrics, having an optional PDM would make sense and would not be much work.

• In Q&A, management praised the new “ACE pump” interoperability designation (t:slim X2). Insulet doesn’t “see any issues” with the special controls and “expect(s) to take advantage of that pathway.” The ACE pump designation doesn’t change Insulet’s innovation plans or timing, but Ms. Petrovic characterized it as “great news” and something the team is “very positive about.” One astute analyst asked if Insulet could quickly integrate FreeStyle Libre 2.0 into Horizon, assuming Omnipod is an ACE Pump and Libre obtains iCGM designation. Ms. Petrovic answered affirmatively: “That’s the beautiful thing about that pathway; if it [Libre] reaches the special controls, it certainly would be a very easy clinical path down the road.” Indeed, assuming an ACE pump designation, Insulet would not need to even run a new clinical study or submit a new PMA to integrate with an iCGM – as we understand it, it would just need to update its label, software, and form a business relationship with the iCGM company.

• Integration with Tidepool Loop was only mentioned in passing – in answering the above ACE Pump question – a surprise given the big 3Q18 news (Insulet is the first Loop pump partner), the patient community’s excitement, and the ongoing Jaeb observational study to support FDA submission. This FDA process is mostly in Tidepool’s hands, though it would be a positive if Insulet made moves to get the ACE pump indication. The critical lynchpin is getting Dexcom to sign on to Tidepool Loop. Tandem is also a very likely candidate, given the ACE Pump designation that fits right into the interoperable vision.

• We learned at ATTD that the DIY community has finally cracked the Omnipod’s communication protocol, and a new RileyLink will be soon be available to use the current pod with Loop. See the RileyLink website here. We expect this to significantly increase interest in the DIY Loop system, offering an in-warranty alternative to out-of-warranty Medtronic pumps. (of course, the commercial Tidepool Loop will use the Bluetooth-enabled Omnipod Dash, no RileyLink needed.) At ATTD, we heard that a researcher in the UK cracked the communication protocol using an electron microscope – whoa! Kelly is very interested in going on this ASAP, following the problems she experienced with the traditional Loop (unlike many who love it like Adam) – stay tuned to hear about patient experiences. This is interesting – the current Loop doesn’t really drive much revenue in the ecosystem beyond pump sets and Rileylinks ($126 each) but we could see the availability of Loop using pods driving considerably more Insulet revenue, depending on how easy it is to set up and use.  

2. U500, U200 Not Mentioned; Presumably U500 Still Not Submitted to FDA

Continuing a trend we’ve come to expect, the Lilly-partnered U500 and U200 Omnipods were not mentioned. As of last month, the U500 had still not been submitted to FDA, with a launch now expected by the “end of 2019/early 2020” – a delay from the previous update to launch in “2019,” which had itself been a major delay. Fairly positive clinical trial data was shared at ADA 2018. This product has been tragically delayed since this partnership was announced in May 2013 – 2,121 days ago! One positive point of emphasis at JPM was that just under 15% of Insulet’s user base already has type 2 diabetes (and growing rapidly), meaning the current reservoir size will fill the needs of many users though there are also many who are likely changing pods more quickly or those who cannot go on the system because they use too much insulin for the product to be efficient for them. Last month, Ms. Petrovic called the Lilly-concentrated insulin Omnipods “attractive, but more as a supporting player than a feature player.” While we’re now not any longer holding our breath for this to come out any time soon, we’ll take “supporting player” – this project is going to be hugely helpful for more type 2 patients when it is ready. We do think understanding the delay in more detail would be useful.

--by Adam Brown and Kelly Close