Memorandum

Insulet 4Q19 – Record Quarterly Sales of $209 Million Rise 27% YOY, Driven by Dash (55% of New US Adds) and Type 2 (30% of New US Adds); Horizon Pivotal Begins, 2H20 Launch – February 25, 2020

Executive Highlights

  • Insulet reported record global revenue of $209 million in 4Q19, rising 27% YOY on a tough comparison to 26% growth in 4Q18 in an exciting call led by CEO Ms. Shacey Petrovic and CFO Mr. Wayde McMillan. Sequentially, sales rose a robust 9% from the previous record of $192 million set in 3Q19. Wow! Exceeding $200 million is a big milestone. US Omnipod sales drove three-quarters of revenue growth in the quarter, rising 36% YOY to $127 million. The 27% YOY growth in 4Q19 is the company’s sixth consecutive quarter of >20% growth, impressive consistency! OUS revenue in 4Q19 fell $2 million from the record $68 million in 3Q19. For the full year 2019, Insulet reported a whopping $738 million in revenue, up 31% from FY18 and beating guidance by $8 million.

  • Now in its third quarter of availability, Omnipod Dash made up a majority (“approximately 55%”) of new patient adds, up from ~50% in 3Q19 and “more than one-third” in 2Q19. Driven by sales of Dash, “over 25%” of Insulet’s volume is now running through the pharmacy channel! This is exciting, as there are a number of distributers that people with diabetes find it difficult to work with and it’s great to see Insulet reducing burden in this way and also adding operational leverage as it expands in this channel. Other patient mix numbers are trending in an exciting direction: “Almost 30%” of new US Omnipod users in the quarter were type 2s (wow!) and “over 80%” of new users came from MDI. With no upfront cost and no four-year lock-in period, Dash is uniquely positioned to expand the pump market, particularly into the large type 2 market. We are thrilled about this since we know that continuous insulin delivery plus much easier boluses are so much better for so many people with type 2 with waning or no beta cell function.

  • Following the announcement at JPM that the pivotal for Horizon began at the “end of December,” Ms. Petrovic shared that “about 8,000 patient wearing days” have been collected. The company shared that one of its principal investigators was invited by ADA to present our pre-pivotal data in a special session – we imagine this is the Friday afternoon session. This is incredible and we are sure Insulet counts itself so lucky every day that Dr. Trang Ly, formerly of Stanford, and a protégé of Dr. Bruce Buckingham, has been in charge of medical at Insulet now for nearly four years. She is brilliant, highly respected, beloved, and has an inimitable sense of what patients want and need. Regarding the n=240 trial, over the course of the three-month study, “about 21,000” days are expected to be collected, meaning the trial is ~38% complete. The trial includes participants 6-70 years old and pre-pivotal data will be presented at ADA 2020 – we are absolutely thrilled to see very young people with diabetes, and, if not the oldest old, at least people in their older years. Data from the pivotal is expected “later this summer” and will be shared “either in publication or at a conference later this year.” Launch is still “on track” for 2H20, with personal smartphone control and Dexcom G6 (and potentially FreeStyle Libre 2?). So far, Ms. Petrovic characterized feedback as “frankly, emotional, and gratifying.”

Insulet reported record 4Q19 financial results this afternoon in a call led by CEO Ms. Shacey Petrovic and CFO Mr. Wayde McMillan. See the key highlights below!

Financial Highlights

1. Record Global Sales of $209 Million, Rising 27% YOY; FY19 Sales of $738 Million (+31%), Beating Guidance by $8 Million; US 4Q19 Omnipod Sales of $127 Million (+36% YOY)

Insulet reported record global revenue of $209 million in 4Q19, rising 27% YOY on a tough comparison to 26% growth in 4Q18. Sequentially, sales rose a robust 9% from the previous record of $192 million set in 3Q19. US Omnipod sales drove three-quarters of revenue growth in the quarter, rising 36% YOY to $127 million. This is the highest share of growth driven by US Omnipod sales since 2Q18. The 27% YOY growth in 4Q19 is the company’s sixth consecutive quarter of >20% growth, impressive consistency! CEO Shacey Petrovic reported “over 80%” of new users coming from MDI, a slight increase from the 80% figure that’s been shared historically.

  • On a full year basis, Insulet reported $738 million in revenue, rising 31% from FY18 and beating guidance by $8 million. The guidance beat was fueled by US Omnipod sales, which came in $7 million above guidance. The 31% revenue growth posted in FY19 is Insulet’s highest full-year revenue growth since 2016 and the fifth consecutive year of >20% annual revenue growth.

  • Record US Omnipod revenue totaled $127 million, rising 36% and $7 million above the high end of guidance. US Omnipod growth rate has now accelerated for five straight quarters, driven primarily by higher volume. Omnipod Dash made up “approximately 55%” of new patient adds in the quarter, about even with last quarter (3Q19) and up from “more than one-third” in 2Q19. Impressively, the pharmacy channel now makes up “over 25%” of Insulet’s total volume (see below).

  • International Omnipod revenue was $66 million, the first sequential decline in six quarters. OUS revenue in 4Q19 fell $2 million from the record $68 million in 3Q19. In 3Q19, CFO Wayde McMillan did note a stronger quarter due to “distributor order patterns.” On a YOY basis, revenue grew a solid 20%, though that’s the smallest YOY growth rate since 2Q18. Mr. McMillan did note a 2% headwind from foreign exchange (i.e., OUS revenue grew 22% operationally). Insulet assumed direct distribution from Ypsomed in July 2018 and the company has faced tougher comparisons in the back half of 2019.

  • Drug Delivery revenue remained flat YOY at $17 million. In contrast to Insulet’s rapidly growing Omnipod revenue, the Drug Delivery business has stalled between $15-$20 million since 2016. This doesn’t seem likely to change in the near-term as Insulet is guiding for drug delivery decline of 15%-20% in FY20. We used to feel that drug delivery was a bit more predictable and could be turned up or down depending on what the rest of the business needed – that said, a 15-20% decline is definitely meaningfully worse compared to recent years, when revenue has been more stable.

2. Full-Year 2020 Guidance: Revenue Growth of 14%-18% ($841-$871 Million), Total Omnipod Revenue Growth of 17%-21% ($788-$815 Million)

Insulet is guiding for revenue growth of 14%-18% in 2020, implying total FY20 revenue of $841-$871 million. Total Omnipod revenue in FY20 is guided for 17%-21% growth. For 1Q20, the company is guiding for 17%-20% total revenue growth, driven by total Omnipod revenue growth of 23%-26%. This sounds like smart although potentially conservative guidance, depending on Horizon.

  • Guidance was a hot topic during Q&A, with analysts asking about the apparent slowdown in growth, especially during the second half of the year. While management declined to provide too much additional color, Mr. McMillan did note harder comparisons in the back half of the year due to “anniversarying” of Omnipod Dash launch in 2Q19. That’s an interesting take – we don’t believe Dash in particular has really driven growth as much as the broader Omnipod story has, and the drive toward Horizon (of which Dash of course is part of the story). In some ways, Dash is actually a bit higher hassle than traditional Omnipod, but of course the excitement surrounding it is the path toward and ever-closer to, automated insulin delivery.

  • Notably, there were also questions about whether launch of Tandem’s Control-IQ and potentially Medtronic MiniMed’s 780G would have a competitive impact on Omnipod in the back half of the year: “We do see and monitor things in our marketplace and we recognize that there's one [AID system] out there now and potential for a second … Having said that, given 80% of our new Omnipod customers come from MDI, we don't rely on two pump renewal cycles. We do think it will create some noise in the US market and we're going to monitor that dynamic a bit closely. But, having said that, we haven't factored that into a major impact to our guidance range.” From our view, the Tandem Control IQ is certainly likely to affect demand for Insulet, but this will be offset by the fact that the pump market is also expanding rapidly currently (driven by AID) and will continue to do so in the future – AID as we’ve said for so many years, is the killer app.

3. $5 Million Net Income, Sixth Consecutive Quarter of Profitability; Gross Margin of 64%; FY19 Net Income of $12 Million

Insulet recorded its sixth consecutive quarter of profitability, with net income totaling $5 million. For the full year 2019, Insulet reported a net income of $12 million, up from $3 million in 2018 and a net loss of $27 million in 2017. Gross margin stayed about even (down 0.1%) with 3Q19 at 64%, though lower from 66% in 2Q19 and 67% in 1Q19 – that’s unsurprising in our view given DASH as an “extra” that patients need to cart around (and that needs to be manufactured). Mr. McMillan noted that US manufacturing costs were “higher than in Q4 than planned,” though this was partially offset by increasing volume (and net margin) through the higher revenue pharmacy channel. Full year gross margin was 65%, down 0.6% from 2018, impacted by investments in Insulet’s US manufacturing lines. Insulet ended 4Q19 with $435 million in cash, down from $637 million at the end of 3Q19. As a reminder, in 3Q19, Insulet completed an $800 million convertible note raise in the quarter; most of the proceeds were used to re-purchase existing notes. Another $210 million was spent this quarter to re-purchase the remaining notes (due in 2021). 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. Mr. McMillan must be busy.

4. Ramping Production of First Automated Production Line, Second Line Installed, Will Produce Omnipods by “Mid-Year”; Third Line to be Installed “This Year”

After Insulet’s first highly automated manufacturing line came online in 2Q19, the company is now ramping up production. A second line is now installed, with “sellable product” expected by “mid-year.” A third line is also planned to come online in 2020, with sellable product “next year.” 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 “a key driver” to Insulet ultimately reaching its 2021 goal of 70%+ gross margins. We wonder what price will do over this time as well as access programs.

Dash, Pharmacy, and Access Highlights

1. Omnipod Dash Makes Up “55%” of New Adds, Helping Drive 25% of Volume Through Pharmacy Channel; “Almost 30%” of New Users Were Type 2s

Now in its third quarter of availability, Omnipod Dash made up a majority (“approximately 55%”) of new patient adds, up from ~50% in 3Q19 and “more than one-third” in 2Q19. This is a pretty impressive rate of adoption and good news for Insulet as Dash generates higher revenue per user. Dash growth continues to be “in line” with pharmacy access.

  • Driven by sales of Dash, “over 25%” of Insulet’s volume is now running through the pharmacy channel! This is an increase from “over 20%” in 3Q19, 15%-20% at the end of 2Q19, and 10%-15% in 1Q19. This is impressively quick movement for Insulet. While Dash is also available through DME (Insulet has one DME Dash contract), the pharmacy channel improves the experience for patients and providers, de-risks cost exposure for payers, and improves profitability for Insulet.

  • “Almost 30%” of new US Omnipod users in the quarter were type 2s. With no upfront cost and no four-year lock-in period, Dash is uniquely positioned to enter this large and underpenetrated market. (Insulet claims a total addressable market of type 2s of 2.5-3 million.) Indeed, Ms. Petrovic noted during prepared remarks that many doctors have begun prescribing Omnipod Dash to their type 2 patients who they would not recommend a traditional pump. At JPM 2020, Ms. Petrovic shared internal Insulet data that showed 66% of Omnipod users would not have moved to pump therapy if it weren’t for Omnipod – we wonder if this number might be higher for type 2s. During Q&A, Ms. Petrovic noted that utilization and attrition rates for type 2s on Dash was no different from those of type 1s, though it is “early to conclusively say” and that Insulet is monitoring those trends carefully. During Q&A, Ms. Petrovic also guessed that Omnipod “probably has the largest market share in type 2,” a notable, though perhaps not surprising, statement though Medtronic has also talked a lot about type 2 growth over the years.

  • Omnipod Dash is also helping to expand the pump market as “over 80%” of new US Omnipod users came from MDI in 4Q19. This comes as a slight increase from the ~80% figure we’ve historically heard, potentially driven by the no-upfront cost and no-risk model with Dash. Converting MDI users has certainly been a focus for Insulet, where in the past, they’ve claimed “60%-65% of the type 1” and “95% or more of the type 2” opportunity is. Comparatively, Insulet is expanding the pump market faster than Tandem, who reported half of their new users coming from MDI in their quarterly results call yesterday

2. International Rollout Begun in UK and Netherlands; Broader Rollout in Europe and Canada in 2020

Omnipod Dash began launch in the UK and Netherlands at the end of December, and rollout across Europe and Canada is expected this year. No specific countries or timelines were given, but in the past, Insulet has said they will focus first on current geographies. Of note, Insulet is also planning to launch Omnipod in five new markets in Europe and the Middle East later this year. None of these launches are expected to “add meaningful revenue” in 2020. While management said that Insulet’s European business is already doing quite well, we do note that currency as well as challenging comparisons slowed the growth in 4Q19 – while launching Dash will likely help boost sales somewhat, Horizon will be the real key.

Pipeline Highlights

1. Horizon AID Pivotal: ~8,000 of ~21,000 Patient Days Completed, “Pre-Pivotal” Data at ADA, To Launch with Smartphone Control in 2H20

Following the announcement at JPM that the pivotal for Horizon began at the “end of December,” Ms. Petrovic shared that “about 8,000 patient wearing days” have been collected. Over the course of the three-month, n=240 trial, “about 21,000” days are expected to be collected, meaning the trial is ~38% complete. The trial includes participants 6-70 years old and pre-pivotal data will be presented at ADA 2020. Data from the pivotal is expected “later this summer” and will be shared “either in publication or at a conference later this year.” So far, Ms. Petrovic characterized feedback as “frankly, emotional, and gratifying.”

  • Last week, during ATTD, Insulet made dual-announcements of agreements with Dexcom and Abbott to incorporate their CGMs into the Horizon system. While the Dexcom announcement was no surprise, it did notably confirm that the companies will add G7 compatibility when that device launches. The partnership with Abbott was more of a surprise, as we had never been sure that FreeStyle Libre 2 would have the technical capability to drive a closed loop system. The dual-partnerships mean Horizon will be the first AID system with two interoperable CGM partners, and on today’s call, it was confirmed that Insulet will submit Horizon as an interoperable “iController.” Ms. Petrovic characterized both Abbott and Dexcom as great partners and expressed excitement for the potential the partnerships to help drive further adoption of Omnipod. See our report for some important takeaways from the announcement. We are a bit surprised that a choice of CGM will be given – this makes for higher ordering hassle (and sales hassle) and while very good for patients, we are a little surprised by the option.

  • Horizon remains “on track” for launch by the end of the year, in line with the timing given for over a year now. Insulet plans on launching Horizon with personal smartphone control and Dexcom G6 (unclear whether the integration with FreeStyle Libre 2 will be ready at that point). 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. Non-Samsung-Galaxy users will be able to use Horizon with a dedicated Dash PDM.

  • It is not clear if the Horizon pivotal will have a parallel control group (i.e., randomized study), though it doesn’t appear so. In other words, the pivotal probably looks 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 (now launched) and Medtronic’s upcoming MiniMed 780G (likely launching by end of 2020). For context, Tandem’s Control-IQ trial was a six-month, randomized study, but took quite a while to complete.

  • Of note, one analyst asked in Q&A whether there was a certain Time in Range benchmark the FDA was expecting Horizon to achieve in order to garner clearance. We personally can’t imagine that would be the case. Ms. Petrovic: “In our discussions with the FDA, they haven't really focused on a particular Time in Range target. It really has been about how these systems safely and effectively manage insulin delivery as opposed to setting out a particular Time in Range target. I guess I would validate that by just pointing to the special controls which have now been published for iCGM for iPump and iController. There really aren't Time in Range targets as part of those special controls.”

  • Insulet continues to highlight Horizon’s algorithm built-onto-the-Pod feature. Presumably, this will allow users to remain in closed loop for longer periods of time as the CGM can communicate directly with Omnipod and doesn’t require the user to carry any additional device(s). Additionally, Ms. Petrovic highlighted “freedom and simplicity” for Horizon – we’re curious what sorts of system parameters Horizon will require at startup (e.g., total daily dose, body weight, carb ratios, etc.).

Prepared Remarks on Horizon from CEO Shacey Petrovic

  • Petrovic characterized three ways in which Horizon will be differentiated from other closed loop products:

    • It is designed for greater time in closed loop;

    • It will provide unparalleled personalized therapy; and

    • It can be controlled by a user's personal smartphone.

  • “In December, we completed pre-pivotal testing and moved into our pivotal study which will support our FDA submission. Demand for trial participation has been incredible with people willing to fly across the country for the last remaining spots, which have now been filled. In fact, within weeks, the majority of our sites completed enrollment. In total our pivotal includes approximately 240 individuals aged 6 to 70 years old. All participants will complete a three-month outpatient study.”

  • “It is important to note that our [pivotal] participants include pediatrics and also individuals coming from both MDI and pump therapy, not just the better-controlled adult population or well-controlled patients already using pump therapy. This is another differentiator compared to other AID systems. We are incredibly excited that study participants are wearing our system at home as part of this final stage of testing and feedback has been terrific. Investigators and participants have shared many amazing stories of how Omnipod Horizon will be a game-changer and transform the diabetes landscape for automated insulin delivery.”

  • “We will share clinical results of our Omnipod Horizon study at the American Diabetes Association Conference in June. One of our principal investigators was invited by ADA to present our pre-pivotal data in a special session. We also expect data for our pivotal testing to be completed later this summer and we will share it either in publication or at a conference later this year.”

2. Tidepool Loop: “Highly Encourage, If Not Require” a Limited Market Release Initially

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, 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.

  • At ATTD 2020, six-month data from Jaeb/Tidepool’s Loop observational study read out, which was made up of mostly Omnipod Loop users. Mean Time in Range increased significantly from 67% at baseline to 73% during months 1-3 and stayed at 73% during months 4-6 (p<0.001). Mean A1c was 6.8% at baseline, decreasing to 6.4% at month six (p<0.001). Jaeb’s John Lum estimated a worldwide Loop user base of ~9,000, based on RileyLink order history, including an impressive 6,449 using Omnipod. Tidepool plans to use the data to support FDA submission, though the timeline is unclear (at ATTD, they said “potentially” in 2020). See our full breakdown in ATTD 2020 Day #2 Highlights.

  • One analyst directly asked about Tidepool, and though management declined to comment on any potential timelines, Ms. Petrovic did note that she would “highly encourage, if not require” a “limited market release” initially. Ms. Petrovic stated that Insulet would do the same with Horizon in order to fully test Insulet’s support capabilities before going into a full market release.

3. Lilly U500 and U200 Omnipods On Hold; Bandwidth Re-Directed Towards “More Attractive Opportunities”

In the first update on concentrated insulin Omnipods, Ms. Petrovic shared during prepared remarks that Insulet is choosing to focus on other opportunities. Specifically, Insulet is choosing to prioritize its limited bandwidth on “AID development efforts with our sensor partners” – presumably, getting Horizon integrated with FreeStyle Libre 2 will take some major work on both sides. During Q&A, Ms. Petrovic emphasized that there was no issue with “the data itself or product itself” with concentrated insulins, but rather a result of shifting priorities: “It is about essentially having to make the tough choices as a leadership team that we have to make. I think a great thing about Insulet is that we are in a position to have multiple growth opportunities and programs and potential steps that we can take in front of us, and our job is to make those tough decisions and prioritize the ones that we think are going to drive the most value for the organization.” We were surprised to hear this since type 2 is clearly a priority – there has been something odd about lack of movement on this front for so long.

  • As of August, the Lilly U500 Omnipod had been submitted to the FDA. Insulet has consistently devoted less airtime to this partnership – while Dash (U100) is appealing to the type 2 population, many who take more insulins would do so much better with concentrated insulins. In January 2019 at JPM, management expected a U500 Omnipod launch by the “end of 2019/early 2020,” although at that point, submission wasn’t expected so late.

  • “It doesn't really diminish our enthusiasm. We look at concentrated insulins as an attractive opportunity. It just means we have more attractive opportunities. In terms of the pipeline, we haven't been public with our entire pipeline. There's a lot going on here, but one thing we have said is that we believe that Omnipod powered by Horizon is a platform that can continue to evolve and grow and bring value to both people living with type 1 and type 2 diabetes. We’ve got really exciting plans on that front to continue to bring iterations of that platform into the marketplace. This is, I think, the right decision. It's all driven by a number of analyses that we do to kind of evaluate one program versus the other. I think the team did a rigorous evaluation and that this prioritization level is the right prioritization.”

 

--by Albert Cai and Kelly Close