Insulet 1Q19 – Dash PDM begins full US launch with 130 million covered lives; Sales of $160 million rise 29% YOY – May 2, 2019

Insulet reported 1Q19 results this afternoon in a call led by CEO Ms. Shacey Petrovic and CFO Mr. Wayde McMillan (his first as CFO). See the key highlights below!

Financial Highlights

1. Global sales of $160 million rise 29%; strong Omnipod gains in the US (+23% to $86 million) and International (+48% to $57 million)

• Insulet reported worldwide sales of $160 million in 1Q19, rising 29% YOY and down only 3% sequentially from the record Q4. The strong Q1 represented an acceleration from 22% YOY growth in 1Q18 and Insulet’s second-highest sales ever. Worldwide sales also exceeded the upper-end of guidance by $4 million ($152-$156 million), as we’ve come to expect from this team. The US and OUS Omnipod businesses were nearly evenly split, supplying 44% and 51% of the quarter’s growth, respectively. This was a record Q1 for new patient starts, and Insulet continues to lead the pump industry in market expansion – “75%” of its new users are from MDI. (Management said the “patient mix hasn’t changed,” and this figure falls right in the range of “over 70%” and “80%” that we’ve heard in various quarters.)

• US Omnipod revenue totaled $86 million, a 23% YOY rise and accelerating from 1Q18’s 18% growth. US Omnipod sales came in $2.1 million above the high-end of guidance, representing the majority of the quarter’s overachievement. US sales declined 8% sequentially, identical to the seasonal drop seen in 1Q18. In 1Q19, Insulet expanded coverage to an additional 5 million lives covered under Medicare and Medicaid, meaning it now has >1/3 of all Medicare covered lives and over half of all Medicaid lives. CEO Shacey Petrovic added that there has been “no slowdown in demand” as Dash’s full market release approached, but that isn’t too surprising – Insulet was not actively promoting Dash in 1Q19, as the full market release only began earlier this week.

• International Omnipod revenue hit a record-high $57 million, a 48% YOY gain and up 4% sequentially. This marks three straight record quarters for OUS Omnipod sales after Insulet took over distribution from Ypsomed (on July 1); plus, 1Q19 performance came on a very difficult comparison (+53% growth in 1Q18). OUS Omnipod sales comprised 36% of total revenue this quarter, up from 33% in 2H18. The focus in 2019 will remain on existing markets, with new countries and an international Dash launch expected in 2020. The next quarter (2Q19) will have a very easy YOY comparison (+7% growth in 2Q18), followed by much tougher comparisons in 2H19 Q4 (+54%-55%.)

• Drug Delivery revenue of $17 million increased 11%, $1.6 million above guidance (larger order from Amgen in the last month of the quarter). This division gets basically no air time on calls and is clearly not driving Insulet growth anytime soon.

2. Third Straight Profitable Quarter: Net Income of $4.4 million, Gross Margin of 67%

• In the third straight quarter of profitability, Insulet reported net income of $4.4 million, down only slightly from $9.9 million in 4Q18 (record sales) and more than double the $1.7 million net income in 3Q18 (its first-ever profitable quarter). The gain was especially big on a YOY basis, as 1Q18 reported a net loss of $7 million. Gross margin held steady at 67% in 1Q19, in line with 4Q18 and 3Q18, and up impressively from 61% in 1Q18. The profit margin expansion was again attributed to continued manufacturing/operational efficiencies, alongside going direct in Europe. Insulet has $393 million in cash, giving it plenty of room to invest in further expansion and marketing Dash.

3. Guidance Raise by ~$4 million, with FY19 Sales Now Expected at $667-$690 million, +18%-22%

• In a positive sign to start the year, Insulet raised guidance by ~$3-$5 million, with 2019 sales now expected at $667-$690 million (+18%-22%). This was up on the bottom- and top-end from the previous $662-$687 million (+17%-22%). In parallel with 1Q19 sales, most of this reflected more optimism in the US Omnipod business – 2019 sales are now expected at $376-$385 million (+16%-19%), a $2-$3 million rise in guidance. International Omnipod revenue expectations rose $1 million on the bottom end, with 2019 sales now expected at $236-$244 million (+37%-42%). (The OUS business will see softer growth in 2H19, as the YOY comparison is tougher in 3Q19-4Q19 following the July 1, 2018 Ypsomed handover.) Drug Delivery revenue guidance is $1 million higher, now at $55-$61 million but still declining 11%-19% YOY.

• For 2Q19, Insulet sales are expected at $160-$165 million (+29%-33%), including: US Omnipod revenue of $89-$91 million (+14%-17%), with some temporary headwind from the no-upfront-cost Dash PDM starting to rollout; International Omnipod revenue of $57-$59 million (+100%-107%) on an easy YOY comparison; and Drug Delivery revenue of $14-$15 million (down 15%-21%).

4. Highly Automated US Manufacturing Now Making Pods: One Line Produces Up to 50% of China Capacity, with Up to 90% Less Headcount

• In an “exciting day” for Insulet, a ribbon cutting ceremony today marked the opening of Insulet’s new $200+ million worldwide headquarters in Acton, MA. The custom-designed, highly-automated US manufacturing facility has successfully begun producing Omnipods, with the expected advantages: one US line will produce up to 50% of the total capacity of Insulet’s China operation, but with up to 90% less headcount. This will bring redundancy to Insulet’s supply chain, and the company plans to install a second line “later this year.” This also means that both US lines together will effectively double current manufacturing capacity, help drive down costs, and increase quality.

Dash, Pharmacy, and Access Highlights

1. Dash PDM Full US Launch Now Underway, with 130 Million Covered Lives (Most in Pharmacy), No Upfront-Cost, No Four-Year Warranty

• Much of the call focused on the US launch of the Bluetooth-enabled Omnipod Dash, which was quietly announced via a letter to healthcare providers on Monday. CEO Shacey Petrovic said “thousands of people” have placed preorders for Dash, without any promotion yet. Insulet is launching Dash with coverage in place for 130 million lives – mostly in the pharmacy – a gain of 10 million lives since February and up from 100 million lives as of January. Insulet has also established distribution through Cardinal Health, complementing its expansion into the pharmacy. The coverage gain has been fast for a new business model, but it also means that ~1/3 US Omnipod users have access to Dash now – clearly coverage will need to build quite a bit more to get the full user base transitioned over. Insulet told us in January that a remarkable >50% of copays for Dash have been <$35, though we’re not sure if that has changed.

• Today’s remarks on Dash reinforced past comments – no-upfront-cost to start pump therapy (“pay as you go”), no four-year warranty lock-in, simpler prescribing for HCPs via the pharmacy channel (e.g., less paperwork), and no upfront risk for payers (per member-per month model). These are major firsts in the US insulin pump industry, and clear advantages in the US over tubed pumps from Medtronic and Tandem (which still front-load payers with a multi-thousand-dollar price upfront, with less ongoing supplies cost). We’re glad to see Insulet focused as much on business model innovation as product innovation, and the former was a far, far bigger focus of today’s investor call. As a reminder, Insulet expects the free PDM in the pharmacy to result in $6-$8 million in lost revenue in 2019, but that will quickly be recouped with slightly higher per-pod pricing (amount not specified).

• As noted earlier this week, Dash is not 100% through the pharmacy; some DME contracts will remain in place, but these will still enjoy the benefits of the no-cost PDM and no four-year lock-in period. Nice! For example, Omnipod Dash is covered under DME with UnitedHealthcare, the largest US commercial payer. (Omnipod in-network coverage with UHC took effect one year ago.)

• Omnipod Dash was FDA cleared last June, and is really a stepping stone to the ultimate goal: personal smartphone app control with the Horizon hybrid closed loop system and no PDM (2H20 launch; see below). The important product upgrades with Dash include the addition of Bluetooth and Wi-Fi connectivity; a consumer-grade, large color touchscreen; an app-based user experience; and apps for users (secondary display) and caregivers remote monitoring). Since Dash is a locked down Android phone, it does remove the integrated Abbott FreeStyle BGM that many Omnipod users love – i.e., BGM users will now need to carry a separate meter, in addition to the Dash PDM. We think this is strategically smart, given the exploding trends in no-cal CGM use and the cost advantages of a locked down Android phone. Dash is currently Bluetooth integrated with the Ascensia Contour Next One BGM, which ports blood glucose values directly into the bolus calculator. Dash insulin data will be relayed to a widget on a user’s own smartphone, which can be viewed alongside Dexcom CGM data – i.e., the CGM data will not be sent to the Dash PDM. An obvious innovation play would be to add FreeStyle Libre and Dexcom integration on the PDM itself; however, given the move to direct smartphone control with Horizon, Insulet may not invest there.

• Management again highlighted Dash’s “very appealing” and “tremendous” potential in type 2 diabetes, given “high satisfaction” in the limited market release and the removal of C-peptide requirements in the pharmacy. The latter is extremely exciting, since pharmacy channel requirements for insulin pumps are “much lower or non-existent” in type 2 diabetes compared to the DME channel – e.g., Medicare requires a C-peptide test to get an insulin pump via DME; no such test is required in the pharmacy channel. Ms. Petrovic said the type 2 segment in the limited market release expressed enthusiasm for Dash’s ease of use, the integrated Calorie King food library, and the temp basal profiles. Reinforcing comments from JPM, she added that type 2 diabetes is ~15% of Insulet’s user base today, and it will grow over time even without concentrated insulin. For example, Omnipod users with type 2 diabetes typically see an “almost 20%” reduction in total daily dose, meaning the current 200-unit U100 pod configuration will suffice for many people with type 2. The U500 Omnipod continues to be positioned as a “niche” product (see below), and U200 still sounds far away (“no update” today).

2. Dash International Launch Delayed to Early 2020; Focus in 2019 is International Product Configuration, Translation, Go-to-Market Strategy

• Insulet now plans to launch Omnipod Dash outside the US starting in early 2020 – back slightly from the previous plan to begin global expansion of Dash in “2H19.” This is not terribly surprising, considering the full US launch is only getting underway now, and Insulet is only ten months into building its direct EU distribution and customer support. Ms. Petrovic emphasized that the team will work to finalize Dash’s international configuration this year, including navigating “different privacy requirements” and different value propositions tied to data and apps.” As of the 3Q18 call, Insulet had received a CE Mark for the Dash system in Europe, an under-the-radar update that has not been publicized.

Pipeline Highlights

1. Omnipod Horizon Pivotal Trial in 4Q19, Launch in 2H20; 2-6 Year-old Data at ADA

A pivotal trial of the Omnipod Horizon hybrid closed loop is expected in 4Q19, keeping it on track for a launch in 2H20 – no change in timing. The plan remains personal smartphone control, initially only on Samsung Galaxy phones. (Tidepool Loop is the iPhone play; see below.) Ms. Petrovic said the Horizon pivotal trial will probably take a “few months” to get through, implying it might wrap up sometime in early 2020. She reminded listeners that Horizon has an FDA breakthrough device designation (announced in 3Q18), meaning Insulet has been in close contact with the FDA and expects an “accelerated” review. (Bigfoot’s Autonomy and Medtronic’s Personalized Closed Loop also have this designation; both seem targeted to launch a year or more after Horizon.)

• At ADA 2019, Insulet has seven abstracts accepted, including Horizon hybrid closed loop outcomes in 2-6 year olds. Insulet will also show real-world data on long-term outcomes from over 20,000 Omnipod users.

2. Tidepool Loop is “Additive To Horizon” and a “Wonderful Way” To Support DIY Community; Timing Unclear

• In prepared remarks, Ms. Petrovic highlighted ongoing Insulet support of Tidepool Loop, the plan to build a commercial version of the DIY Loop app on Apple iOS, get it FDA approved, and integrate with interoperable pumps and CGMs. Ms. Petrovic clarified that Tidepool Loop “is additive to Horizon” and a “wonderful way to support the DIY community.” She candidly noted that DIY users are already using Loop off-label – the Omnipod code was just released – which offers a “compelling indication of significant market demand” and a reminder of “why we are supporting the Tidepool program and investing to get Horizon to market.” Well said! Insulet was the first (and remains the only) interoperable pump partner (announced in 3Q18); Dexcom has not signed on, but is an obvious next candidate. Loop is currently in a large observational study, which will gather real-world data to support the FDA submission.

• Which will be first to market – Tidepool Loop or Omnipod Horizon? It’s unclear: “There were many reasons to partner with Tidepool, and one was they potentially had a faster path to market – if they are able to get FDA to agree to the clinical strategy. We are prepared to capitalize on whatever product makes it to market first, and we do see value in both programs.” Assuming the ongoing observational study is all Tidepool needs, it could come to market around the same time as Horizon or potentially earlier – depending on the FDA review and Tidepool’s launch plan.

• Reiterating 4Q18, Insulet does expect to use the interoperable ACE Pump designation. The team has reviewed the special controls and believes Omnipod “doesn’t have issues” meeting them. Insulet is “not in any hurry” to submit for this indication, however, as Horizon “has runway” and there is “no other iCGM” besides Dexcom right now. It will be fascinating to see if Abbott’s FreeStyle Libre 2 gets iCGM designation (currently under FDA review) – will that encourage Dexcom-integrated pump companies (e.g., Insulet, Tandem) to add Abbott integration?

3. Lilly U500 Omnipod to be submitted to FDA in “Next Few Weeks”; No Update on U200; Both Positioned as Incremental Products for Type 2

• At long last, the Lilly-partnered U500 Omnipod will be submitted to the FDA “in the next few weeks.” The summative human factors study was just completed. No launch timing was given today, but January’s JPM talk expected a launch by the “end of 2019/early 2020.” Continuing recent updates, Ms. Petrovic emphasize that the U500 Omnipod is a “niche” product and “won’t really move the needle from a revenue standpoint.” Fairly positive clinical trial data was shared at ADA 2018. This product has been tragically delayed since this partnership was announced in May 2013 – over 2,181 days ago!

• In a direct question about the Lilly U200 Omnipod, Ms. Petrovic only said, “No update on U200.” We assume much of the learning from the U500 project will translate to U200, though it would be a regulatory blow if Insulet/Lilly had to run another clinical trial for this configuration. The U200 product is a bigger market opportunity than U500, though today’s comments suggested the current U100 Omnipod will satisfy the insulin needs of many users with type 2 diabetes.

--by Adam Brown and Kelly Close