Memorandum

Insulet 2Q19 – Record sales of $177 million rise 43% on strong US Omnipod adoption; Horizon on track for pivotal in 4Q19, 2H20 US launch – August 5, 2019

Executive Highlights

  • Insulet reported record worldwide sales of $177 million in 2Q19, rising 43% YOY on an easy comparison to 13% growth in 2Q18. Revenue came an impressive ~$15 million above guidance, with most of the beat coming from higher-than-expected US Omnipod sales in the first full quarter of Dash’s US launch. US Omnipod revenue totaled $98 million, rising 26% YOY and 14% sequentially. US patient demand and patient starts are “at all-time record highs.” OUS Omnipod sales of $63 million more than doubled (+120%) YOY on an easy comparison to $29 million in 2Q18 (lower-than-expected sales on the OUS inventory transition).

  • FY19 sales guidance was raised by ~$29 million at the midpoint, now at $700-$715 million (+24%-27% YOY). This was the second straight guidance raise and much bigger than 1Q19’s ~$4 million raise. Slower growth is expected in 2H19, particularly for OUS Omnipod – 2Q19 was the fourth quarter with an easy YOY comparison following the pricing lift from going direct in Europe.

  • Net income was $1.4 million, Insulet’s fourth straight profitable quarter. This was down from $4.4 million (1Q19) and $9.9 million (4Q18) as Insulet invests in the new US manufacturing plant and moves the business to the pharmacy (with a no-cost PDM).

  • Coverage for Omnipod Dash has accelerated, with “approximately 50%” of all US lives now covered, up from ~one-third in 1Q19. More than one-third of new customers in 2Q19 received Dash, with the “vast majority” shipped through the pharmacy channel. Currently, ~15-20% of the total US customer base is receiving pods through the pharmacy, up from 10-15% previously. While still a minority, that’s fast expansion. Early launch indications suggest improved uptake in type 2 diabetes, given easier access in the pharmacy (less paperwork, no C-peptide, no upfront cost). Dash user feedback remains “superb,” with 90% of customers saying they are “very satisfied.”

  • By the end of 2Q19, Insulet also expanded coverage to >50% of all Medicare lives covered (up from just over one-third at the end of 1Q19). Medicaid coverage is up to ~60% of all lives, up from over half at the end of 1Q19. These are serious access wins!

  • A pivotal trial of the Omnipod Horizon hybrid closed loop is still expected to start in 4Q19, keeping it on track for a US launch in 2H20 – no change in timing. Between now and then, Insulet expects to “complete commercial development” of the product.

Insulet reported record 2Q19 financial results this afternoon in a call led by CEO Ms. Shacey Petrovic and CFO Mr. Wayde McMillan (his second as CFO). See the key highlights below!

Financial Highlights

1. Record Global Sales of $177 Million Rise 43% YOY; US Omnipod Sales of $98 Million (+26% YOY) Drive Guidance Beat; OUS Sales Rise 120% to $63 Million

Insulet reported record global revenue of $177 million, rising 43% YOY on an easy comparison to 13% growth in 2Q18. Sequentially, revenue rose a strong 11% from $160 million in 1Q19. Sales surpassed the record $165 million set in 4Q18 – quite impressive for Insulet to beat a fourth quarter this early in the year. 2Q19 sales blasted ~$15 million past the expectation for $160-$165 million in sales, driven mostly by higher-than-expected US Omnipod revenue ($8 million over guidance) with a meaningful contribution from OUS Omnipod (~$5 million over guidance). From a growth perspective, OUS Omnipod sales still drove nearly two-thirds of 2Q19 company growth, benefitting from: (i) the fourth quarter with a pricing lift after going direct in Europe in mid-2018 (i.e., this benefit has now anniversaried); and (ii) a very easy YOY comparison to 2Q18 OUS (see below). In sum, Omnipod is firing on all cylinders globally, and we’d expect a strong 2H19. Insulet also continues to expand the pump market, with “approximately 80%” of new Omnipod users converting from MDI – similar to 1Q19 and well ahead of Tandem’s “approximately half.” 

  • US Omnipod revenue of $98 million rose 26% YOY and 14% sequentially, coming a notable $8 million above the mid-point of guidance ($89-$91 million). The YOY growth accelerated from 19% US growth in 2Q18 – a great start out of the gate for the launch of Omnipod Dash. US patient demand and patient starts are “at all-time record highs,” US coverage for Omnipod Dash greatly expanded in 2Q19 (see below), and “more than one-third” of new customers received Dash. The “vast majority” of Dash PDMs shipped through the pharmacy channel, with “enthusiastic” customer response for Dash’s pay-as-you-go model with no upfront cost and no four-year lock-in.

  • OUS Omnipod revenue totaled $63 million in 2Q19, more than doubling (+120%) from $29 million in a weak 2Q18. As expected following the transition to direct distribution in Europe, International Omnipod sales set a new record for the fourth straight quarter, surpassing 1Q19’s $57 million. The 120% growth came on a particularly easy comparison to just 7% YOY growth in 2Q18; the weak growth in 2Q18 related to inventory buybacks when Insulet assumed direct distribution from Ypsomed in July 2018. International Omnipod revenue made up 39% of global revenue, up from 36% in 1Q19 and 33% in 2H18. Growth in the 2H19, however, will come on much tougher comparisons to >50% YOY growth in both 3Q18 and 4Q18.

  • Drug Delivery revenue came in at $16 million, down slightly from $18 million in 2Q18 and $17 million in 1Q19. The Drug Delivery portion of Insulet’s business has stayed between $15-$20 million since 2016 and is becoming a smaller and smaller portion of Insulet’s rising revenue. Once discussed as a major potential business – see JPM 2015, just after Patrick Sullivan took over as CEO –  Drug Delivery has not panned out thus far.

2. Full Year Sales Guidance Raised by ~$29 Million at Midpoint: $700-$715 Million, +24%-27% YOY

Insulet raised full-year sales guidance by ~$29 million at the midpoint, from the previous $667-$690 million (+18%-22%) to $700-$715 million (+24%-27% YOY). This is the second straight guidance raise following 1Q19’s smaller ~$4 million bump – clearly confidence has accelerated given 2Q19’s robust performance. Even at the top end of the new guidance, slower growth is expected in 2H19, given notably tougher comparisons to 2H18.

  • 2019 US Omnipod revenue is now guided for $391-$399 million (+24%-27% YOY), a ~$15 million rise in guidance; OUS Omnipod revenue is expected at $246-$250 million (+43%-45%), an ~$8 million rise; and Drug Delivery revenue is guided for $63-$66 million (-3% to -8%), a ~$6 million rise.

  • 3Q19 revenue is expected at $174-$181 million (+15%-20% YOY) and ~flat sequentially. US Omnipod revenue is guided for $98-$102 million (+22%-24% YOY) and international Omnipod revenue is guided for $61-$63 million (+22%-26% YOY). Drug delivery revenue is expected between $15-$16 million (-15%-21%).

3. Four Consecutive Quarters of Profitability; Operating Income of $7.6 Million; Net Income of $1.4 Million; Gross Margin Steady at 66%

For the fourth straight quarter, Insulet reported positive net income, even with sizeable investments in US manufacturing. Net income was $1.4 million in 2Q19, compared to a net loss of $1.7 million in 2Q18, but down from $4.4 million in 1Q19 and $9.9 million in 4Q18. Gross margin was 66% for the quarter, pretty flat from 67% in 1Q19 and even with 2Q18. This small sequential decline in gross margin was expected, given the impact of Insulet’s investment in a new highly automated US manufacturing line. Insulet ended 2Q19 with $372 million in cash, down slightly from $393 million in 1Q19. The business is generating positive operational cash flow.

4. Production Begins on First US Automated Manufacturing Line; Second Line to be Installed Later This year

Production has begun at Insulet’s new highly-automated US manufacturing line in Acton, MA – see a video here. The new production line is part of a $200+ million investment to move Insulet’s global headquarters to Acton, MA. The investment presents a headwind to short-term gross margin, but will generate huge gains in efficiency, costs, capacity, redundancy, and co-location with the innovation team. Installation of a second Omnipod manufacturing line is planned for 2H19 with production beginning in 2020. No time to rest given this growth! In 1Q19, we heard that this production line would be able to produce half the output of Insulet’s Chinese manufacturing operation with one-tenth the headcount! In preparation for the US manufacturing transition, Insulet has built up pod inventory to ensure a smooth transition.

Dash, Pharmacy, and Access Highlights

1. Omnipod Dash is now covered for ~50% of US Lives, adding ~60 million in one quarter; 15-20% of customers now in pharmacy

Notably, coverage for Omnipod Dash was expanded to “approximately 50%” of all US covered lives, up from ~one-third in 1Q19 – that translates to an additional ~60 million covered lives in one quarter! As coverage builds over the year, Insulet will be able to transition more of the user base over to Dash and increase Dash uptake in new users. In addition, “greater than 50% of all Medicare lives” are now covered for Omnipod, up from “over one-third” in 1Q19 – wow! Medicaid coverage has also continued the upward trajectory, now at “approximately 60%” covered – up from “over half” in 1Q19. Insulet is making remarkable strides on access, and we’d guess the no-upfront-cost for pump therapy is highly appealing to payers vs. the competition.

  • Insulet ended 2Q19 with 15%-20% of the total US customer base receiving pods through the pharmacy, up from 10%-15% “previously.” It’s certainly going to take time until a majority of the business is in the pharmacy (similar to Dexcom), though this represents a very fast transition in just one quarter of Dash’s availability.  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.

  • Insulet did not break out any user or revenue numbers for Omnipod Dash in the first full quarter of availability, but noted that “more than one-third” of new customers received Dash. As expected, the pharmacy channel made up the “vast majority” of shipments for Dash. We expect both number to improve as Dash’s coverage build throughout the year.

  • Early indications suggest Dash has accelerated Omnipod uptake in insulin-dependent type 2s – amazing news for the company to expand into a high-need market with significant runway. Ms. Petrovic cautioned that the “uptick” in type 2 is too early to call a “trend.” Still, we’d only expect this to increase, given how long it takes to build awareness of any diabetes technology. Dash’s user-friendly design – combined with the pay-as-you-go business model in the pharmacy (no upfront cost), simpler HCP prescribing, and no C-peptide requirement – are key differentiators to expand into this population. The Insulet team has also started to launch messaging and educational initiatives specifically for people with type 2 diabetes.

  • Ms. Petrovic described early customer feedback for Dash as “superb.” According to an internal survey of the first Dash users, 90% of customers are “very satisfied” and said they would recommend Dash to a friend. (An actual NPS score was not shared.) 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. This is absolutely the right call for Insulet and users, though it does require that the team continue to deliver great innovation.

    • In Q&A, Ms. Petrovic noted that attrition has not changed on Dash so far, though the team initially wondered if it might increase – i.e., making it easier to get on Dash will broaden the funnel of users, and a no-cost PDM makes it easier to stop using the product (no guilt). So far this has not been observed, and we agree with Insulet’s thinking: the upside of a wider funnel and lower barriers to access should outweigh any change in attrition. Dash is also a better designed product than the previous PDM, and the pharmacy access is lower hassle for everyone; if anything, we’d expect attrition to decrease. The one risk to Insulet is automated insulin delivery -  

  • International launch of Omnipod Dash is planned for “2020.” The 1Q19 call expected to start with an “early 2020” launch, though today’s call did not use the word “early.” As of the 3Q18 call, Insulet had received a CE Mark for the Dash system in Europe.

Pipeline Highlights

1. Horizon on Track for Pivotal Start in 4Q19; 2H20 US Launch; Committed to Smartphone Control, Ease of Use for MDI, Pediatric Indication

A pivotal trial of the Omnipod Horizon hybrid closed loop is still expected to start in 4Q19, keeping it on track for a US launch in 2H20 – no change in timing for several quarters now. Between now and then, Insulet will “complete commercial development” of the product. Mr. Petrovic emphasized the three areas of focus for Horizon: (i) “breakthrough ease of use” – building a system that MDI users can transition to; (ii) personal smartphone control – “all market research indicates that’s a gamechanger”; and (iii) launching with a pediatric indication (presumably 2+ years). She emphasized the system’s highly differentiated “on-body-ecosystem” design, embedding the algorithm in the tubeless pod itself, talking directly to the Dexcom G6 CGM, and allowing users to remain in closed loop when the phone is out of range, when in the shower or water, etc. “This is a crucial differentiator from tubed pumps. The pod is always talking to the CGM. Our system architecture is designed for more time-in-loop and more time-in-range.” (What a catchy phrase, “time-in-loop”! We’d love to see “TIL” catch on as shorter version of “time spent in closed loop.”) Ms. Petrovic again reminded listeners that Horizon has an FDA breakthrough device designation, meaning Insulet has been in close contact with FDA and expects an “accelerated” review. We’ll be eager to see how long it takes the FDA to review Tandem’s Control-IQ; it was just submitted ahead of a planned 4Q19 launch. Control-IQ does not have a breakthrough designation, so it might represent an upper-end estimate of Horizon’s FDA review. Medtronic’s next-gen MiniMed 780G is currently in its pivotal, slated for a launch by ADA 2020 – ahead of Horizon.

  • The plan remains “personal smartphone control” for Horizon, presumably still on Samsung Galaxy phones initially and expanding from there. Timing for Horizon on iPhone has never been confirmed, though we’d guess iPhone users will have the option of using a Dash-like handheld until a personal iPhone app is available. (It’s also possible Insulet will find a way to launch apps for both phone operating systems.) Tidepool Loop is also a terrific near-term option for iPhone users on Omnipod (see below), though the architecture puts the algorithm on the iPhone and requires it to be in range of the pod.

  • At ADA, Dr. Bruce Buckingham shared extremely positive data on use of the Horizon hybrid closed loop in 2-6 year olds. Ms. Petrovic characterized it as “very powerful” data – 73% time-in-range – in a “very, very challenging population.” The free-living, hotel study – including ample physical activity and meal challenges – compared 48-72 hours of hybrid closed loop with a tablet computer, Dexcom sensor (model not specified, though G4 used in studies presented to date) to seven days of patients’ standard therapy.

    • Horizon use resulted in an incredible 4.2 hour/day increase in time in the range of 70-180 mg/dl (73% vs. 55%; p=0.0002). This effect was driven by a dramatic reduction in hyperglycemia, with 3.6 fewer hours/day spent >180 mg/dl (25% vs. 40%; p=0.005) and a remarkable 2.7 fewer hours/day spent ≥250 mg/dl (6% vs. 17%; p=0.002). Time in hypoglycemia was also reduced, albeit not significantly from a statistical perspective due to the small number of participants. Numerically, time <70 mg/dl fell by a half hour per day with Horizon (5% vs. 3%; p=0.24) and time ≤54 mg/dl was cut by ~20 minutes/day (1.8% vs. 0.4%; p=0.15), a 78% reduction.

    • Mean glucose with Horizon was significantly lower than that on standard care (172 mg/dl vs. 148 mg/dl; p=0.017). That’s roughly a 0.5% A1c reduction, similar to 670G. Overall, coefficient of variation (CV) dropped from 40% to 36% (p=0.02) – hitting the often-used CV goal of ≤36% (Monnier). Overnight, CV dropped from 37% to a remarkable 25% (p=0.0009) – wow! The modal day chart below clearly shows flatter, narrower, and more in-range glucose values with Horizon, and Dr. Buckingham commented repeatedly that the system performed very well. He shared that a parent stayed with each participant overnight, and when they woke up in the morning, a couple of the mothers were in tears because it was the first night since their child was diagnosed with type 1 that they slept through the night; and when they woke up, the child had a flat, in-range blood sugar. Impressively, though the core MPC algorithm didn’t undergo any major tweaks to better fit the 2-6-year-old population, it performed essentially the same in this age group as it has in the previous studies.

    • Horizon – with a tubeless patch pump, G6 sensor, and algorithm running on the pod – should be very appealing in the pediatric cohort when it comes to market. The persistent hyperglycemia and variability is tough in this population, especially with the fear of hypoglycemia (just glance at the baseline data).

2. Tidepool Loop: “Additive To Horizon”; Plans for ACE Pump designation: “We fully expect our system to be interoperable”

Echoing 4Q18 and 1Q19, Ms. Petrovic reiterated support for Tidepool Loop, plans to eventually file for an ACE pump designation (timing unclear), and a clear focus on enabling interoperability and patient choice. Omnipod was added to the DIY version of Loop in April and has received positive anecdotal reviews and certainly expanded the number of DIY Loopers. As of ADA, Tidepool/Jaeb’s Loop observational study had 550 people actively sharing Loop data, with ~80% of the cohort of new Loopers in the study using an Omnipod. We conservatively estimated over 2,500 people were using the DIY Loop iPhone app globally, with either an Insulet or Medtronic pump.

  • “We are aware of growing off-label use of the (DIY) Loop algorithm, and while we cannot condone or support it, we want to make sure this system is safe and effective – getting an iOS version of Loop cleared by FDA and commercially supported on Omnipod. This system will allow access from the App Store on a user’s iPhone; it is additive to our internal Horizon program, and we are pleased to have the opportunity to support patient choice and the passionate and driven DIY community.” – Ms. Petrovic in prepared remarks

  • “We fully expect our system to be interoperable. This is part of the rationale behind partnering with Tidepool. We see the value of interoperability.” – Ms. Petrovic in Q&A

  • When will Insulet file for an ACE pump designation?We haven’t shared that. We fully expect to take advantage of it. It’s not necessary until we have additional sensors that are iCGMs. We’re not in a hurry, but it is part of our strategy for both Tidepool and likely Horizon.” – Ms. Petrovic in Q&A

  • At Friends for Life last month, Tidepool CEO Howard Look said the following regarding FDA submission timing on Tidepool Loop: “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.” Thus far, Insulet and Medtronic plan to integrate with ACE pumps, while Dexcom and Medtronic plans to integrate with iCGMs. We’d guess an Insulet/Dexcom-integrated Tidepool Loop will be the first combination ready for launch, since Medtronic is still far from iCGM filing (FDA submission planned for April-October 2020).

3. Lilly U500 Omnipod Submitted to FDA (“Niche” product); No Update on U200; Type 2 Opportunity is Already Accessible Today with Dash

In Q&A, Ms. Petrovic confirmed that the Lilly U500 Omnipod has been submitted to FDA – on par with 1Q19 and reiterating comments from ADA. No launch timing was given today, but January’s JPM talk expected a launch by the “end of 2019/early 2020.” Comments once again positioned this as a “niche” product that was “never intended to have a major contribution to revenue.” There was no update on the U200 Omnipod, which has “more potential” but is still going to be incremental to Insulet’s type 2 play. Said Ms. Petrovic: “Market research is showing us that concentrated insulin will be helpful, but it’s not required to see significant growth in the type 2 insulin-dependent patient population. With the pod’s ability to reduce total daily dose, and how appealing the product is – simplicity, discretion – we probably already have access to the majority of insulin-dependent type 2s. We’re making an effort today (with Dash), rather than waiting for concentrated insulin.” We’re glad to see Insulet pushing ahead into type 2, especially given how lengthy the drug-device development process has been for U500.

  • Lilly has its own tubed pump in late-stage development – how will that affect its priorities in this partnership? Insulet has steadily downplayed the potential of both of these products over the past few quarters, given the clear upside of Dash (U100); how much investment will we see here?

 

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