Insulet 3Q19 – Record Sales of $192 Million Rise 27%, Driven by Dash uptake (including in T2D); Horizon AID pivotal start next month, 2H20 launch – November 5, 2019

Insulet reported record 3Q19 financial results this afternoon in a call led by CEO Ms. Shacey Petrovic and CFO Mr. Wayde McMillan (his third as CFO). See the key highlights below!

Financial Highlights

1. Record Global Sales of $192 Million (+27% YOY), Beats High-End Guidance by $11 Million; US Omnipod Sales of $110 Million (+ 34%); OUS Sales Rise 35% to $68 Million

Insulet reported global revenue of $192 million in 3Q19, rising 27% YOY on a tough comparison to 24% growth in 3Q18. Impressively, 3Q19 revenue came in $11 million above than high-end revenue guidance given in 2Q19. US Omnipod sales drove most of the guidance beat, crossing the $100 million mark and totaling $110 million in the quarter (+34% YOY). For the first time since 2Q18, US Omnipod growth drove the majority (61%) of the quarter’s overall growth. Insulet has posted five consecutive quarters of >20% revenue growth and is on track for a fourth consecutive year of >20% annual revenue growth. Omnipod is also continuing to expand the pump market, with “75%-80%” of new US users coming from MDI – in line with rates Insulet has shared in the past and well ahead of Tandem’s “approximately half.”

• Record US Omnipod revenue totaled $110 million, rising 34% YOY and coming in $8 million above the high-end of guidance. US Omnipod’s growth rate has accelerated for four straight quarters, driven primarily by higher volume – another quarter of record new patient starts and a higher per-pod pricing with Dash. Dash made up half of new customers in the quarter, up from “more than one-third” in 2Q19. Insulet is seeing excellent momentum in the pharmacy channel, particularly in type 2 diabetes (details below).

• International Omnipod revenue was $68 million, a record for the fifth consecutive quarter and rising 35% YOY on a tough comparison to 55% growth in 3Q18. OUS Omnipod revenue came an impressive $5 million above the high-end of guidance ($61-$63 million). The strong growth was driven by demand in Insulet’s existing European markets and during Q&A, CFO Wayde McMillan noted a stronger Q3 due to “distributor order patterns.” OUS Omnipod sales now make up 35% of global revenue, falling slightly from 39% in 2Q19 and 35% in 1Q19. As a reminder, 3Q19 marks the anniversary of the first quarter (3Q18) in which Insulet assumed direct distribution from Ypsomed in July 2018. Posting 35% growth one year later suggests the OUS business remains very healthy and has a lot of runway in existing markets.

• Drug Delivery revenue fell to $15 million, a 21% YOY decline from $19 million in 3Q18. In contrast to Insulet’s rapidly growing Omnipod revenue, the Drug Delivery business has stalled between $15-$20 million since 2016. Mr. McMillan noted the drop in Drug Delivery revenue was “a result of updated production planning” (i.e., mostly Amgen’s Neulasta).

2. Full-Year Guidance Raised by $19 Million at Midpoint to $722-$730 Million, +28%-29% YOY

Insulet raised full-year guidance for the third-straight quarter, this time by $19 million at the midpoint. The company is now guiding for $722-$730 million in revenue for 2019, up from $700-$715 million in 2Q19. The updated guidance represents 28%-29% in YOY revenue growth, a significant acceleration from 22% annual growth in FY2018.

• US Omnipod revenue for 2019 was raised by $17 million at the midpoint, from $391-$399 million to $410-$414 million. The new guidance represents 27%-28% revenue growth. OUS Omnipod revenue is guided for $251-$253 (+46%-47%; a $4 million rise), while Drug Delivery revenue is guided for $61-$63 million (-8% to -11%; a ~$2 million decline).

• 4Q19 revenue is guided for $193-$210 million (+17%-22%), which would set a new revenue record, even at the low-end. US Omnipod revenue is expected at $116-$120 million (+25%-29%), international Omnipod revenue is expected at $64-$66 million (+16%-20%), and Drug Delivery revenue is expected at $13-$15 million (-10% to -22%).

3. ~$240 Million Net Cash Raise; Five Consecutive Quarters of Profitability; Net Income of $0.9 Million; Gross Margin Falls Slightly to 64%

Insulet recorded its fifth consecutive quarter of profitability, with net income coming in at $0.9 million. Gross margin fell slightly to 64% from 66% in 2Q19 and 67% in 1Q19, though the drop was guided for as Insulet invests in its new highly automated US manufacturing line. Insulet ended the quarter with a remarkable $637 million in cash, up from $372 million at the end of 2Q19. The company completed an $800 million convertible note raise in the quarter, which netted $240 million in cash after most of the proceeds were used to re-purchase existing notes. Insulet got the new notes (due in 2026) at a very attractive interest rate – just 0.375% - compared to the prior notes that were due in 2021 at 1.25% interest. In essence, the company raised significant non-dilutive cash at very attractive terms. Insulet now has plenty of financial flexibility to make significant investments in its manufacturing and supply chain operations. Could we see it pursue M&A – e.g., CeQur? Valeritas?  

4. Second Highly Automated US Manufacturing Line Being Installed, Third Line Coming in 2020

After Insulet’s first highly automated manufacturing line came online in 2Q19, a second line is now being installed. The second line is expected to produce product by mid-2020, and a third line is also planned to come online in 2020. The new automated lines are part of a $200+ million investment to move Insulet’s global headquarters to Acton, MA. The new lines will drive redundancy in the supply chain and are expected to be “the single largest contributor” to Insulet ultimately reaching its 2021 goal of 70%+ gross margins.

Dash, Pharmacy, and Access Highlights

1. Omnipod Dash Made Up ~50% of New Customers, Helping Drive 20% of Total US Volume Through Pharmacy Channel

In its second full quarter of availability, uptake of Omnipod Dash is humming along, making up “approximately 50%” of new customer starts in the quarter, up from “more than one-third” in 2Q19. CEO Shacey Petrovic stated that physicians are recommending Dash to more MDI users, “particularly type 2 patients.” Indeed, prepared remarks and Q&A repeatedly noted the “significant increase” in type 2 diabetes users (not quantified, but very exciting and a major win for the pump industry), including in the Medicare population.

• With Dash sales primarily coming through the pharmacy channel, “over 20%” of Insulet’s total US volume is now running through pharmacy. That number was described as 15%-20% at the end of 2Q19 and 10%-15% in 1Q19 – fast movement! While it will take time to move the majority of Insulet’s business to the pharmacy channel, this is unquestionably the goal and where Insulet is going. While Dash is also available through DME, the pharmacy channel improves the experience for patients and providers, de-risks cost exposure for payers, and improves profitability for Insulet. During Q&A, Mr. McMillan shared that the headwind from no-upfront cost PDMs was actually lower than expected thus far, as Insulet is still selling the PDM through the DME channel for those who don’t have Dash coverage.

• Coverage for Omnipod Dash was expanded to “more than 50%” of US covered lives in the quarter, up slightly from “approximately 50%” in 2Q19 and about one-third in 1Q19. As coverage continues to expand, Insulet will be able to transition more of its user base over to Dash. Not surprisingly, the no-upfront-cost Dash has been “well-received” in Insulet’s conversations with payers. Medicare, where Dash currently has “more than 50% of covered lives,” was cited as a particular driver of Dash’s expansion into the type 2 population, as 40% of the type 2 population is ≥60 years old.

• Ms. Petrovic characterized early feedback on Omnipod Dash as “overwhelmingly positive.” As she shared on the 2Q19 call, an internal survey of the first Dash users found 90% of customers are “very satisfied” and said they would recommend Dash to a friend. Retaining people on Dash will be critical for Insulet as the subscription-based revenue model is an at-risk business model – a customer can leave at any time without feeling locked in to a four-year warranty. In 3Q19, there were no changes in attrition rates for Dash, something that the company is tracking carefully.

• Insulet continues to focus on expanding the pump market by converting MDI users (where “60%-65% of the type 1” and “95% or more” of the type 2” opportunity is), and Dash’s model significantly reduces the cost barrier to starting pump therapy. Availability through the pharmacy and easier HCP prescribing (less paperwork) will also make the technology easier to access and start for type 2 and MDI populations – big advantages over Medtronic and Tandem right now.

2. Limited Launch of Dash in “Select European Markets” Next Month

Omnipod Dash will be launched across Europe “throughout 2020,” with a “limited market release” of Dash in “select European markets” to commence next month (December). We did not hear much on the size or locations of the limited release, but Ms. Petrovic did note that 2020 efforts will mostly focus on current countries. New international expansion with Dash is not expected to add “meaningful incremental revenue” in 2020. Given how well Insulet’s OUS business is doing, we have to imagine Dash will only buoy sales – especially as Tandem expands internationally with Basal-IQ. Insulet’s 1Q19 call expected Dash’s roll-out to begin in “early 2020,” though we didn’t heard the word “early” in either today’s call or in 2Q19. As of the 3Q18 call, Insulet had received a CE Mark for the Dash system in Europe.

Pipeline Highlights

1. Horizon AID Pivotal to Start in December: Three Months, n=240, peds included; Launch Still in 2H20 with Smartphone Control

Insulet plans to start its Horizon automated insulin delivery (AID) pivotal trial next month (December), sharing the first-ever details on study design: a three-month pivotal trial enrolling 240 people with diabetes across a broad age range, including pediatrics. Insulet has already completed Horizon’s formative human factors studies and is in the midst of summative human factors testing. CEO Shacey Petrovic said that “feedback has been terrific.”

• A US launch of Horizon is still expected in 2H20 with personal smartphone control and Dexcom’s G6 iCGM. Remarkably, Insulet has maintained this same launch timing for five straight quarters (3Q18, 4Q18, 1Q19, 2Q19, today) – wow! Previously, Insulet expected smartphone control to initially launch only on Samsung Galaxy phones, expanding to other phones over time. We’re not sure if that has changed or will change as the pivotal/submission progresses. Presumably non-Samsung-Galaxy users will be able to use Horizon with a dedicated Dash PDM.

  • One analyst pressed management on the timing in Q&A, to which Ms. Petrovic responded convincingly: “I feel great actually about the timeline. We've got a terrific team developing this and Dr. Trang Ly leading it, who is arguably one of the world's experts in artificial pancreas research and development. Also, I think we really benefit from some great regulatory tailwinds. Remember, we've got an iCGM that is already cleared [Dexcom G6]. We've got an ACE pump that is already cleared, and what we're working on is the algorithm clearance and the system clearance, so we've got a lot of tailwinds behind us. And we also benefit from the breakthrough devices program. And just to give a little color there, I think this last PreSub [meeting] with the agency is the seventh one we've had this year. So the level of collaboration and support on behalf of the agency has just been fantastic. So if you think about the timeline, we feel like we're in really good shape. This trial will take approximately three months, and then we'll move into compilation and submission. And we feel confident that we'll be on the market in the second half of next year.”

• Ms. Petrovic noted several Horizon differentiators – especially the algorithm embedded on the pod itself and direct Dexcom-to-pod communication. As we’ve covered for three years now, this means a user will remain in closed loop when the phone/handheld is out of range – i.e., Horizon is a full on-body closed loop ecosystem, meaning it should drive extremely high time-in-closed loop (similar to Tandem’s Control-IQ).

  • Horizon will also be “plug-and-play,” designed for simplicity “even for new users coming from multiple daily injections.” We’ll be interested to learn more about the system startup parameters and underlying settings – will Horizon initiate with a total daily dose alone?

  • Horizon’s algorithm sounds like it will have some built-in adaptation – “The system optimizes automated insulin delivery based on actual daily insulin used, which means it should require less ongoing maintenance.” This sounds similar to the MiniMed 670G’s feature, which tunes aggressiveness based on previous days’ total daily dose.

  • As expected, Horizon will also include the ability to select multiple glucose targets. At ADA in June, Dr. Bruce Buckingham presented on a pediatric study that used targets of 100, 110, 120, 130, 140, or 150 mg/dl.

• It is not clear if the Horizon pivotal will have a parallel control group (i.e., randomized study), though we’d guess not. In other words, this might look more like the MiniMed 670G pivotal trial, comparing baseline outcomes with manual pump and CGM to three months on closed loop – the huge advantage there is rapid speed to market, which is key for Insulet given Tandem’s Control-IQ (under FDA review; launch expected before end of this year) and Medtronic’s upcoming MiniMed 780G (launch expected by April 2020). For context, Tandem’s Control-IQ trial was a six-month, randomized study, but took quite a while to complete.

Prepared Remarks on Horizon from CEO Shacey Petrovic:

• “In terms of new product innovation, we are in the final stages of our Omnipod Horizon development and are extremely excited to bring our game-changing automated insulin delivery system to the market in the second half of next year. We have designed a system we are incredibly proud of, and we remain on track to start recruiting for pivotals next month. This will consist of a three-month outpatient clinical study of 240 individuals across a broad age range, including pediatrics. We are excited to send people home with our Horizon automated insulin delivery system in a matter of weeks.

• With Horizon, Insulet will be the first to deliver tubeless personal smartphone-controlled automated insulin delivery (AID). Horizon's unique form factor and the incredible design work that has gone into securing our algorithm on the pod give Insulet strong competitive advantages over other AID devices. Horizon’s architecture is uniquely positioned to provide more time in closed loop because we have done the work to put the algorithm directly on our disposable pod rather than on an accompanying device the user must carry around. Our engineering teams have worked closely with our colleagues at Dexcom to enable the Dexcom sensor to speak directly to our pod without requiring a PDM or phone to be in closed loop. These highly complex technical programs require great collaboration and great design and engineering work to keep the user experience simple. Horizon is designed to be plug-and-play, even for new users coming from multiple daily injections. Over time, the system optimizes automated insulin delivery based on actual daily insulin used, which means it should require less ongoing maintenance. Horizon will offer an out-of-the-box experience where anyone can easily transition to our AID system. You simply put on a pod and with your Dexcom sensor, and within minutes you are in closed loop. It's as simple as it gets.

• We know that diabetes can be a significant burden and is always front of mind. We also know that users don't want to have to think more about their diabetes, and nobody's needs are exactly the same. Horizon will offer a personalized approach to customized diabetes management. One of the system's unique features is the ability to select multiple glucose targets to allow for personalized control and a unique level of customization. Horizon is designed to provide an unparalleled level of flexibility to give our users personalization and peace of mind.

• People living with diabetes helped us design these and other Horizon features. We have completed our formative human factor studies and are in the midst of our summative human factors testing, and feedback has been terrific. So we are thrilled to be in the final stages of our development work and to bring our advanced system to the diabetes community next year.”

2. Tidepool Loop – Continued Support; ACE Pump Designation in September; Abbott FreeStyle Libre Partnership?

Insulet continues to support Omnipod integration with Tidepool Loop – the vision of an interoperable AID app accessible through the Apple App Store and compatible with many ACE pumps and iCGMs. Insulet was the first Tidepool Loop partner (one year ago, nearly to the day), and Omnipod Dash’s interoperable ACE Pump designation (FDA cleared in September) was a critical step towards this vision. At ADA in June, both Dexcom (G6 iCGM) and Medtronic (future ACE Pump and iCGM) signed on to integrate with the app.

• The last timing on Tidepool Loop came at Friends for Life in July: “We never want to be the company that contributes to mis-set expectations (like ‘a cure in five years’), so we want to keep expectations low. We hope it's measured in months, not years. We let the FDA know that we set an aggressive target of trying to have a submission prepared before the end of the (calendar) year, but there’s a lot that's out of our control, so that's just an estimate. We promise to keep the community up to speed as things proceed.” 

  • If we had to speculate, next potential partners for Tidepool Loop could be Tandem (t:slim X2 ACE Pump clearance in February) and Abbott (FreeStyle Libre 2 iCGM remains under FDA review). A Senseonics iCGM filing is likely to be a 2020 event.

• Could we ever see an Insulet/Abbott FreeStyle Libre partnership, following the Tandem/Abbott announcement? CEO Shacey Petrovic shared the following balanced answer in Q&A: “We always designed Dash, which is our interoperable [ACE] pump, that will be the basis of the submission for Horizon to be interoperable. It's why we went to the phone because Dexcom is already on the phone with their app and so is Libre. We don't have anything to announce right now. We are incredibly excited about our partnership with Dexcom on Horizon. But I will say we see a great experience in Europe, where there's a lot of overlap between Libre and Omnipod users as well. So we’re focused on Horizon, and we see great opportunity for interoperability with Dash and Horizon.”

3. No Mention of Lilly U500 or U200 Omnipods; U500 Presumably Still Under FDA Review

In a call with significant focus on use of Omnipod in type 2 diabetes, there was not a single mention of the Lilly-partnered U500 and U200 Omnipods – neither in prepared remarks or Q&A. As of August, the Lilly U500 Omnipod had been submitted to the FDA; we assume it remains under review. The lack of updates was not a surprise, as Insulet has consistently devoted less airtime to this partnership – quite understandable, since Dash (U100) is appealing so well to the type 2 population. In January at JPM, management expected a U500 Omnipod launch by the “end of 2019/early 2020” – timing that is still within reach. Presumably we’ll hear the next update at JPM, unless the U500 Omnipod is cleared beforehand.

--by Albert Cai, Adam Brown, and Kelly Close