Insulet 2Q17 – Record-high sales of $110 million, Omnipod grows 16% in the US and 60% OUS; “thrilled’ to go direct in Europe following Ypsomed agreement expiry; Dash FDA submission in 4Q17 – August 3, 2017

Insulet reported strong 2Q17 financial results this afternoon in a call led by CEO Patrick Sullivan, CFO Michael Levitz, and President Shacey Petrovic. The call focused on the sales/profitability upside of going direct in Europe starting on July 1, 2018, following the Ypsomed agreement’s expiration. See the top financial and pipeline highlights below!

Financial and Business Highlights

1. All-time record revenue of $110 million grew a robust 26% YOY in 2Q17, exceeding the mid-point of guidance by ~$4 million for the second straight quarter. Sales also came against a difficult comparison to 2Q16’s strong 44% YOY growth. Revenue rose 8% sequentially from 1Q17, and all three business lines contributed to the momentum.

2. Record US Omnipod revenue of $65 million grew a solid 16% YOY and 10% sequentially in 2Q17, slightly exceeding guidance ($62.5-$64.5 million). The US contributed 40% of Insulet’s 2Q17 growth, the second highest point in the past six quarters. The US installed base grew 15% YOY in Q2, in line with 2017 expectations. Clearly, the competitive US pump field does not seem to be impacting Insulet. Insulet’s US pipeline “is the strongest it has been in company history.”

3. International Omnipod sales of $27 million also hit an all-time high, increasing 60% YOY on a tough comparison, providing 44% of Insulet’s overall 2Q17 growth, rising 6% sequentially, and marking a record-high for the fifth straight quarter. The international installed base grew over 70% YOY in 2Q17. Management cited strong momentum in France, now almost 1/3 of the company’s ~50,000 international customers.

4. The news that the Insulet-Ypsomed distribution agreement will expire (June 30, 2018) was not a surprise two weeks ago, but it was the call’s dominant focus and greeted with enormous management enthusiasm. Remarks made a compelling case for the advantages of Insulet going direct in Europe – accelerated growth, margin expansion, more control, closer to Insulet’s ~50,000 international customers – and assuaged concerns over Ypsomed’s incentives over the coming year. Ypsomed is also contractually obligated to meet certain targets over the next year, and its final payment (an estimated ~$50 million) is based on the number of patients using Omnipods sold by Insulet in the 12 months post mid-2018. Going direct will drive a 50%+ revenue increase for Insulet, meaning 2018 will see a “material increase” in OUS revenue.

5. Management significantly raised full-year 2017 revenue expectations to $440-$450 million (+21% YOY), up a notable $12.5 million at the midpoint. US Omnipod revenue is now expected at $263-$268 million (+16% YOY, a $4 million midpoint increase), while international Omnipod sales are now expected at $105-$108 million (+48% YOY, an $8 million midpoint increase).

6. Management also increased 2017 guidance to 25% YOY growth in the global installed base, with 15% YOY growth still expected in the US and 40% YOY growth expected outside the US (up from the previous 30%). This implies a deceleration in international base growth in 2H17.

7. Following the Ypsomed news, management is now guiding for a 2021 gross margin target of  70%, up significantly from the previous 65%. In line with the analyst day, the plan remains $1 billion in annual sales by 2021 and above-market profitability. The move to direct distribution in Europe is expected to add four-percentage points alone to overall company gross margin.

Pipeline Highlights

8. The new Bluetooth-enabled Omnipod Dash PDM (locked down Android phone) and pod debuted at ADA and will be submitted to the FDA in 4Q17. No launch timeline or details were provided for competitive reasons. The “4Q17” timing was more specific than the previous “2H17,” signaling that things are (likely) pretty dialed in at this point. We have to imagine the review will be quick, enabling a possible early 2018 launch.

9. No pivotal or launch timing was given on Insulet’s Omnipod Horizon automated glucose control system. We assume the previous “2019” launch and “2018” pivotal timing still stands. Impressively, the product is entering its third IDE study, enrolling 48 patients in a hotel-based trial at three centers. The study is expected to wrap up by October. Data looked good at ADA.

10. A launch of the Omnipod with Lilly’s U500 is still expected in 2019, followed by a 2020 launch of the U200 Omnipod – these were the same timelines given in 1Q17, though less specific than the investor day timelines for “1H19” and “late 2019-early 2020” launches.

Financial and Business Highlights

1. All-time record revenue of $110 million grew a robust 26% YOY in 2Q17, exceeding the mid-point of guidance by ~$4 million for the second straight quarter ($104-$108 million). Sales also came against a difficult comparison to 2Q16’s strong 44% YOY growth. Revenue rose 8% sequentially from 1Q17, and all three business lines contributed to the momentum: half of the guidance beat came from US pod, with the rest split between International pod and Drug delivery. The business really saw some nice sequential and YOY momentum this quarter.

Insulet Quarterly Revenue (2Q13-2Q17; millions) – Total, US Omnipod, International Omnipod, Drug Delivery

2. Record US Omnipod revenue of $65 million grew a solid 16% YOY and 10% sequentially in 2Q17, again exceeding guidance ($62.5-$64.5 million) and edging out the previous record high ($63 million in 4Q16). The US contributed 40% of Insulet’s 2Q17 growth, the second highest point in the past six quarters (following last quarter). The US installed base grew 15% YOY in Q2, in line with full-year expectations. Clearly, the competitive US pump environment does not seem to be impacting Insulet. Management cited 1Q17’s sales force expansion, stronger DTC advertising (especially digital), and broader market access as key drivers – notably, expanded Medicaid access in the quarter added 2 million more covered lives, bringing total US Omnipod coverage access to 58% of all covered lives in the US. (There was no Medicare update today.) Management said the US pipeline “is the strongest it has been in company history.” 3Q17 US Omnipod revenue is expected to be $67-$69 million, a 5% sequential increase and 14% YOY growth at the midpoint.

• Insulet has hired Bret Christensen as its new Chief Commercial Officer. President Shacey Petrovic said he has hit the ground running and brings expertise in consumer marketing, sales force optimization, and “winning in highly competitive markets.” He will lead all commercial operations for the US and Canada. He spent the previous three years at Myriad Genetics, and prior to that, worked at Hologic with many of his now-Insulet colleagues.

3. International Omnipod sales of $27 million also hit an all-time high, increasing 60% YOY, providing 44% of Insulet’s overall 2Q17 growth, and marking a record-high for the fifth straight quarter. Notably, the international installed base grew over 70% YOY in 2Q17. The YOY comparison was also difficult, as sales doubled in 2Q16. Revenue rose 6% sequentially from the previous record-high in 1Q17. Management again cited very strong momentum in France, which now comprises almost 1/3 of the company’s ~50,000 international customers. 3Q17 growth is expected to moderate somewhat to 44% YOY ($27-$28 million). However, Insulet now expects 40% YOY growth in the international installed base in 2017, up from the previous 30%.

4. CEO Patrick Sullivan called July 20’s news a “day of significant transformation in Insulet history.” The news that the Insulet-Ypsomed distribution agreement will expire (June 30, 2018) was not a surprise, but it was the call’s dominant focus and greeted with enormous management enthusiasm. (Mr. Sullivan used the phrase “absolutely, positively thrilled” at least three times.) Remarks made a compelling case for the advantages of Insulet going direct in Europe – accelerated growth, margin expansion, more control, closer to Insulet’s ~50,000 international customers – and assuaged concerns over Ypsomed’s incentives over the coming year. As noted two weeks ago, Ypsomed will be paid an estimated ~$50 million, with the final amount depending on the number of patients using Omnipods sold by Insulet in the year after Insulet assumes distribution on July 1, 2018. This should incentivize a solid handover and durable growth once Insulet takes over. Ypsomed is also contractually obligated to meet certain targets over the next year, making it less likely it will downshift on this business. Going direct will drive a 50%+ revenue increase over what Insulet receives from Ypsomed, meaning 2018 will see a “material increase” in international revenue (and obviously, margins too).

• Notably, Insulet has been evaluating international scenarios for nearly two years. Said Mr. Sullivan, “The decision came down to control, execution, margin expansion, and shareholder value creation." Insulet obviously must execute the transition smoothly, but today’s call left little doubt for investors that this is the right strategic move for the company on many fronts.
• Insulet already has an international headquarters set up in the UK that includes HR, regulatory and commercial leadership. The company is also leveraging an advisory board and third party expertise to make the transition go as well as possible. 
• Insulet and Ypsomed are currently in 13 markets in Europe, though sales are concentrated in four markets: France, Germany, Netherlands, and UK. This should make the transition easier and focus commercial efforts. Ypsomed estimates there are ~50,000 Omnipod users in Europe, with a notable ~1/3 in France alone. Management noted that the transition to the French market will be particularly straightforward, as there are home-based providers that actually serve as an interface between the manufacturer and patient – including for training and customer support.
• Management estimates EU pump penetration at ~20% vs. ~30% in the US. Notably, Omnipod attrition in the US is ~9%, while in Europe it’s only ~2-3%. “Once a patient gets on the product in Europe, they are set for life. It’s vastly different in the US.”
• Insulet does expect the rapid growth in France to moderate. However, optimism was still very high about the international business – we’ll have to wait until early 2018 to hear guidance and expected sales for this direct business.

5. Given two straight quarters beating guidance, management significantly raised full-year 2017 revenue expectations to $440-$450 million (+21% YOY), up a notable $12.5 million at the midpoint (previous: $425-$440 million, +18% YOY). US Omnipod revenue guidance is now expected at $263-$268 million (+16% YOY), a $4 million increase from the previous midpoint. International Omnipod sales are now expected at $105-$108 million, rising 48% YOY (an $8 million rise at the midpoint). Drug delivery revenue is expected at $72-$74 million, up 12% YOY (a $1 million rise at the midpoint). Given the international momentum, some felt that guidance was conservative; management emphasized that it is appropriate, given the pending change in the distribution. However, comments also emphasized that Ypsomed is contractually obligated to keep selling the Omnipod over the next year, and its final payment will be based on how well the Omnipod does after Insulet takes over – both should help mitigate risk now that the expiration has been announced one year early.

• 3Q17 revenue is expected to hit a record-high $112-$116 million, rising 20% YOY. Management again expects growth driven by all three business lines – $67-$69 million for US Omnipod (+14% YOY), $27-$28 million for international Omnipod (+44% YOY) and $18-$19 million for drug delivery (+15% YOY).

6. Management also increased 2017 guidance to 25% YOY growth in the global installed base, with 15% YOY growth still expected in the US and 40% YOY growth expected outside the US (up from the previous 30%). We’d note that the base grew 30% YOY in 1Q17 and 35% YOY in 2Q17, meaning 25% for all of 2017 implies a deceleration in the back half of the year. Indeed, management is guiding for quite a deceleration in the international business in 2H17 –40% YOY growth in 2017 is well back of the 60%-70% growth seen in 1H17. Assuming this is true, Insulet’s global installed base would be ~135,000 users by the end of 2017, up from ~105,000-110,000 at the end of 2016. Management reminded callers that base growth is the best predictor of revenue growth, but in any given quarter, it has a small impact on overall revenue.

7. Following the Ypsomed news, management is now guiding for a 2021 gross margin target of  70%, up significantly from the previous 65%. In line with the analyst day, the plan remains $1 billion in annual sales by this time and above-market profitability. 2Q17 gross margin came in at 59%, up from 58% in 1Q17 and 2Q16. The move to direct distribution in Europe is expected to add four-percentage points alone to overall company gross margin. Insulet believes it is on track to approach 60% gross margins for 2017 and to be sustainably EBIT positive beginning in 2018. Hitting $1 billion in annual sales by 2021 will definitely require strong execution – sales need to grow at 22%-23% per year in 2018, 2019, 2020, and 2021 to get there.

• The highly automated US manufacturing facility in Massachusetts remains on track to be operational in 2019. At the same time, the team has continued to reduce scrap, increase productivity, improve line efficiency, and move more shipments from air to ocean.

Pipeline Highlights

8. The new Bluetooth-enabled Omnipod Dash PDM (locked down Android phone) and pod debuted at ADA and will be submitted to the FDA in 4Q17. No launch timeline or details were provided for competitive reasons. However, management said “We’re going to have attractive avenues to access the system for existing and new users.” The 4Q17 submission timing was more specific than the previous “2H17,” signaling that things are (likely) pretty dialed in at this point. Given how much human factors work has gone into this product, we have to imagine the review will be quick, enabling an early 2018 launch. See our detailed coverage of Dash from the ADA booth and Insulet’s product theater – we think the product looks terrific.

• Management said the feedback in the ADA booth was overwhelmingly positive, with 94% of respondents indicated that Dash was a significant improvement over the current PDM, and 90% agreeing that it was the right future platform for Insulet. More than 80% of those surveyed felt that it would be faster to train patients on vs. the current product.
• Insulet’s busy booth showed off the new Bluetooth-enabled Omnipod Dash PDM for the first time. Reps gladly took us through the PDM’s brand new user interface on the locked down, consumer-grade Android phone (see picture below) – and boy is it a major improvement in form factor and user experience over the current PDM, and a definite upgrade over the “prototype” from ADA two years ago. We’re glad to see IOB prominently displayed on the home screen, clear display of last blood glucose and last bolus, easy access to take a bolus (center button on the bottom), a simple swipe to display the current basal profile graphically and key pod status, a nicely laid out bolus calculator (click to see all the math in detail), and great use of a side-bar menu to put less-used functions and settings. The off-the-shelf Android phone is very slim and retains the touchscreen quality and consumer-grade hardware that we’ve all come to expect out of modern devices. This does not feel like a medical device – that is for sure! After the demo, booth-goers filled out a market research survey soliciting opinions and feedback. We noticed several survey questions on expectations for battery life, and it will be interesting to see what longevity Insulet comes to market with – as a locked down Android phone not running cellular (micro USB charge), we assume it would last multiple days on a single charge (this is our speculation). Ascensia’s Bluetooth-enabled Contour Next BGM was situated next to each Dash PDM – we didn’t get to demo the integration, but it was great to see this on display so soon after the integration announcement at the start of ADA! Users can also enter a BG manually using an on-screen scroll wheel (like the One Drop app) or via typing the number.

• Other UI/UX features in Dash: It’s easier to view and change basal segments, a feature placed quite prominently in the app’s user flow (one swipe from the main home screen). (Arguably this does not warrant being so upfront, given how infrequently patients and HCPs are changing basal profiles. We agree that Dash has made it much easier to do so!) The food library has also been revamped and expanded, and Dash has a nice “Shopping Cart”-like feature to add multiple foods into one meal. Users can also see a progress bar as a bolus is delivered and cancel it while in progress. We did notice the phone has a camera, which in a future version of the UI/UX could possibly enable pictures of meals overlaid with CGM and insulin data.

9. No pivotal or launch timing was given on Insulet’s Omnipod Horizon automated glucose control system. We assume the previous “2019” launch and “2018” pivotal timing still stands. Impressively, the product is entering its third IDE study, enrolling 48 patients in a hotel-based trial at three centers. The study is expected to wrap up by October. Boy is Dr. Trang Ly running a tight ship and cranking these studies out – the algorithm has been tested in 82 patients this far (3,384 hours of closed loop, 70 nights), including meals and exercise. Insulet’s standing-room-only Horizon product theater at ADA was a big hit, attracting over 400 attendees – we were very impressed with all the screenshots we saw. Insulet continues to move up in our automated insulin delivery competitive landscape, with potential to be second or third to market in the US with a hybrid closed loop.

• Insulet continues to discuss smartphone control of the Omnipod with the FDA. Ms. Petrovic said this could “maybe” come before Horizon. She added the FDA recognizes patients want this feature, and there is now a panel of experts on this topic. “We’re working very hard to get to phone control. We know it’s what patients want. And we’d like to be leaders.”

10. A launch of the Omnipod with Lilly’s U500 is still expected in 2019, followed by a 2020 launch of the U200 Omnipod – these were the same timelines given in 1Q17, though less specific than the investor day timelines for “1H19” and “late 2019-early 2020” launches. Ms. Petrovic noted that U500 will be more niche (those with very high insulin needs), but Insulet expects to be the only approved pump for this insulin. U200, she said, “is the molecule that really unlocks the type 2 market.” The brilliance of these products is retaining the same Omnipod form factor and manufacturing, but doubling Insulet’s addressable market for those with higher insulin needs.

Pipeline Summary

-- by Adam Brown and Kelly Close