Memorandum
Executive Highlights
- Insulet and Ypsomed both announced on Friday that their current global distribution agreement for the Omnipod will expire on June 30, 2018. Starting July 1, Insulet will assume all Omnipod distribution, sales, marketing, training, and support in Europe.
- According to Ypsomed’s press release, the companies could not agree on a contract extension “as the price demanded by Insulet Corp. would have made continued economic viability impossible.” We assume Insulet was looking for higher margins.
- Ypsomed will ultimately receive what they estimate as ~$50 million from Insulet, a pretty significant sum in our view. To align incentives, the final amount Insulet pays will depend on the number of patients using Omnipods sold by Insulet in the 12 months after Insulet assumes distribution in mid-2018. The more Insulet pays, the bigger the market will have become.
- Insulet does not expect this change to have an impact on its 2017 financial guidance, which calls for international Omnipod sales of $97-$100 million (+38% YOY growth). Once Insulet’s direct EU operations are established, management expects it will be accretive to earnings (which seems ambitious but certainly possible), with plans to still be EBIT positive in 2018. Investors clearly liked the news (better margins for Insulet), as the stock has hit an all-time high.
- Ambitiously, Ypsomed now plans to launch its own patch pump, the YpsoPod, in the “mid-term.” Following publication, we confirmed this means the second half of 2020 (calendar year). We’d note the manufacturing and design challenges of launching a patch pump are significant, so it will be interesting to watch how this progresses. We’d assume at minimum there would be lots of legal barriers.
Insulet and Ypsomed both announced on Friday that their current global distribution agreement for the Omnipod will expire on June 30, 2018. Starting July 1, Insulet will assume all Omnipod distribution, sales, marketing, training, and support activities in Europe – going direct as it has in Canada will obviously offer Insulet more distribution control and higher margins, though obviously it will also take on more internally. This deal is a definite loss for Ypsomed, as the Omnipod drove an estimated CHF 120 million in annual sales (~$127 million) and CHF 24 million (~$25 million) in annual operating profits in FY17.
Insulet will compensate Ypsomed ~$50 million to assist in the establishment of European distribution structures, enabling Insulet to go direct on its own. In a smart move to align incentives, the final compensation from Insulet will depend on the number of patients using Omnipods sold by Insulet in the 12 months after distribution resposibilities shift hands in mid-2018 – a very strategic play to ensure Ypsomed continues to prioritize the Omnipod while the deal is still in effect for another year.
We had been expecting this news based on recent Insulet commentary and ever since Ypsomed launched its own tubed YpsoPump in FY17 with similar ease-of-use marketing to the Omnipod – that created strange financial incentives in our view.
According to Ypsomed’s press release, the companies could not agree on a contract extension “as the price demanded by Insulet Corp. would have made continued economic viability impossible.” Insulet has long been dinged by investors for the lower margins through this distribution deal, and presumably the companies could not agree on the right transfer pricing to move forward. Once Insulet’s direct EU operations are established, management expects it will be accretive to earnings, with plans to still be EBIT positive in 2018. Insulet investors clearly liked the news (better margins for Insulet, more control), as the stock has just hit an all-time high (~$53/share, $3.1 billion market cap). Of course, Insulet will also need strong execution as it takes all these functions in-house; on the plus side, it has experience doing this in Canada, going direct in 2015 following the GSK partnership termination.
In an attempt to fill the revenue gap left by the Omnipod, Ypsomed also announced plans to bring its own patch pump, the mylife YpsoPod, to market in the “mid-term.” Following publication, we confirmed this means the second half of 2020 (calendar year). No further details were provided on product design or timing, though this announcement was obviously important to allay Ypsomed investor concerns and fill the product portfolio hole. We’ll be fascinated to follow how quickly this comes to market, since the durable YpsoPump was in development for years and developing/manufacturing a patch pump is probably an order of magnitude more difficult than a durable pump. A lot of things will have to go right for this to go well, but we would not underestimate Ypsomed and its very popular brand.
This partnership, dating back to 2010 under Insulet’s previous management team, has unquestionably been fruitful for both companies. Most recently, Omnipod achieved impressive 67% YOY user base growth in Ypsomed’s FY17, and international Omnipod sales reached an all-time high of $25 million in Insulet’s 1Q17 for the fourth straight quarter. Given that international Omnipod sales were responsible for 47% of Insulet’s overall 1Q17 growth, it is imperative that as Insulet goes direct, it maintains continued expansion in OUS markets – particularly as the US remains quite competitive. International Omnipod sales are expected to be $97-$100 million in 2017, reflecting +38% YOY growth (vs. $256-$258 million, +14% YOY growth in the US). The global Omnipod user base is expected to reach ~130,000 users by the end of 2017 (+20% YOY), with ~60-65% in the US (~80,000) and ~35-40% outside the US (~50,000).
- As Insulet goes direct next year, it will need to continue strong international Omnipod momentum. International Omnipod sales have seen YOY growth of 63%, 35%, and 33% over the last three quarters – pretty high! While US sales have historically been higher, growth in the European market continues to be superior, given the lower base of sales and possibly less competition. It’s nice for Insulet, undoubtedly, to think of higher-margin sales.
Omnipod Sales, US and International (2Q13-1Q17; millions)
- As a reminder, Ypsomed’s durable and touchscreen mylife YpsoPump soft launched in the Netherlands, UK, Germany, and Czechia in FY17, and is slated for expansion into ten additional markets this fiscal year, including Austria this summer, and Switzerland, Belgium, and Italy in the fall. A press release also indicated entrance into Spain, France, and India in 2017. We’re curious to see how the YpsoPump will do in France, as it is the second largest pump market in Europe, with Ypsomed previously citing over 47,000 pumpers. Given the Omnipod’s strong success in this market, it will be fascinating to see how the YpsoPump does.
- The YpsoPump is due for an upgrade in FY18, adding permanent Bluetooth connectivity with the mylife App, BGM integration, a lower age indication, a five-year warranty, and a manual fill option. Bluetooth connectivity will also likely be utilized for Ypsomed’s future plans to incorporate CGM (partner not specified), which would certainly help in competition with other insulin pumps.
- We’ve consistently pointed out (May 2017, June 2016, May 2016, etc.) that the Insulet-Ypsomed partnership took an odd optics turn once Ypsomed launched its own in-house-developed durable pump. Though Ypsomed management has always claimed the pumps were quite differentiated, we’ve noted the same focus on “ease of use,” “simplicity,” and “discretion.” Of course, tubed vs. tubeless pumps are quite different, and Ypsomed has achieved impressive growth with the Omnipod alongside its soft-launched YpsoPump. It will be fascinating to see how Ypsomed does if/when it launches YpsoPod – doing it presumably will be pretty complicated, but possible. Though there is plenty of ground to tackle in Europe, we also wonder if Ypsomed will consider expansion into the US market – we doubt it, given the high costs and intense competition.
Close Concerns Questions
Q: How will the distribution transition affect Omnipod International sales? Will Omnipod sales continue on the strong upward trajectory?
Q: Since this news comes one year before the expiration, does it create any weird incentives for Ypsomed? It’s smart of Insulet to tie Ypsomed’s compensation to the international patient base size, but there could be a free-rider problem here – Ypsomed knows the contract is expiring and could conceivably drive patients to its own pump.
Q: How does international distribution affect Insulet’s cost structure and internal burden? Can management achieve the ambitious goal for no impact on earnings/profitability outlook?
Q: Is Ypsomed considering expansion into the US or Canada? Are there any data concerning the recent soft launch of the YpsoPump regarding uptake.
Q: Can Ypsomed launch a competitive patch pump only three years from now, manufacture it at scale, and compete with Insulet and potentially others?
-- by Maeve Serino, Adam Brown, and Kelly Close