Memorandum

Insulet 1Q16 – US OmniPod grows 29% YOY on easy comparison; Bluetooth PDM submission later in 2016; artificial pancreas launch in late 2018 – April 28, 2016

Executive Highlights

  • US OmniPod revenue totaled $50.7 million, a 29% year-over-year (YOY) increase on an easy to 1Q15. International OmniPod sales of $15.4 million more than tripled YOY, also on an easy comparison.
  • “Between 70-80%” of Insulet’s new patient starts are from MDI – that’s gone up a bit! Insulet expects to grow its worldwide installed base by 20% in 2016 (from 85,000 to over 100,000).
  • “Later this year” Insulet plans to submit a 510(k) for its next-gen Bluetooth-enabled PDM and mobile app. Clinical trials will also begin “later this year” for Insulet’s automated insulin delivery system; the company plans to be in the market in “late 2018.”

Insulet reported 1Q16 results this afternoon in a call led by CEO Patrick Sullivan, CFO Michael Levitz, and President Insulet Diabetes Products Shacey Petrovic. See the business and pipeline highlights below, followed by a pipeline summary.

Financial and Business Highlights

1. US OmniPod revenue totaled $50.7 million, a 29% year-over-year (YOY) increase and a modest 4% sequential decline from a record-high 4Q15. The comparison was very easy to 1Q15’s very low OmniPod sales (4% YOY decline), though sales did slightly exceed guidance. Management guided for “mid to upper teens” YOY US OmniPod growth in 2Q16.

2. International OmniPod revenue totaled $15.4 million, more than tripling YOY on an easy comparison to abnormally low sales in 1Q15. Sales were flat sequentially from a record-high 4Q15. International performance exceeded the top-end of guidance for $13-15 million in sales. Management expects $15 million in 2Q16 International OmniPod sales, doubling YOY.

3. President of Insulet Diabetes Products Shacey Petrovic said that “between 70-80%” of Insulet’s new patient starts are from MDI, a slight acceleration from the standard 70% - very good news that the company is still expanding the pump market. Insulet expects to grow its worldwide installed base by 20% in 2016, consistent with 4Q15 guidance (from 85,000 at the end of 2015 to just over 100,000 at the end of 2016).

4. Total 1Q16 revenue of $81.2 million exceeded guidance ($77 to $80 million) and grew a striking 69% YOY, excluding Neighborhood Diabetes (divested to Liberty Medical for $5 million in cash in February). It’s a major positive for Insulet’s overall business, profitability, and focus that the Neighborhood business is out of the picture.

5. Net loss was $10.7 million in 1Q16, flat with 1Q15’s net loss of $10.4 million, but a significant improvement from 4Q15 (-$27.3 million). Management still hopes to be EBIT positive in 2018.

6. Insulet recently appointed Dr. Aiman Abdel-Malek as Senior VP of Advanced Technology and Engineering. His strong background should aid Insulet’s greater push into mobile connectivity, apps, software, and data. Medical Director Dr. Howard Zisser’s departure for Verily earlier this month was not acknowledged in prepared remarks, but did come up in Q&A.

Pipeline Highlights

7. “Later this year” Insulet plans to submit a 510(k) for its next-gen Bluetooth-enabled PDM and mobile app, which will display key real-time pump data on the phone AND integrate with Dexcom’s G5 app. No clearance timeline was given, but we assume the end of 2016-early 2017 expectation from JPM still stands. The submission timing is on track with 4Q15’s guidance.

8. Insulet plans to enter clinical trials “later this year” for its automated insulin delivery system. The company plans to be in the market in “late 2018,” roughly consistent with the timing first shared in 4Q15 (“pivotal study” toward the end of 2017”). Management expects the automated insulin delivery product to include a Bluetooth-enabled pod and mobile connectivity. The company is still in FDA discussions about insulin dosing from a smartphone phone app

9. Insulet still expects the updated U500 and U200 OmniPod PDMs with partner Lilly to launch in “two to three years.” The ongoing U500 study (n=416) has enrolled half of its patients (up from “one third” in 4Q15), and completion is still slated for December.

10. The first Insulet patient app will still launch this quarter (Q2), allowing customers to reorder supplies and get training or customer support. The app is non-regulated and will be available for both iOS and Android. Management called it the first step in “Digital Insulet, and the company hopes it will improve patient retention. Presumably it will also reduce demands on the internal customer service and supply reordering team.

Financial and Business Highlights

1. US OmniPod revenue totaled $50.7 million, a 29% year-over-year (YOY) increase and a modest 4% sequential decline from a record-high 4Q15. The comparison was very easy to 1Q15’s disappointing 4% YOY decline in US OmniPod sales ($39 million). However, 1Q16’s YOY growth did slightly exceed the expectation for ~25% YOY growth, and edging over the $50 million mark was positive – a good base to build from as 2016 unfolds. The gains were attributed to improved commercial execution, better account targeting, stronger clinical messaging, better sales pipeline management internally, and a growing body of evidence supporting pump therapy (not specified).  

  • No patient growth figure was given for 1Q16, but the US and overall OmniPod patient bases are on track to grow 20% in 2016 (on par with prior guidance). As of 4Q15, the OmniPod US patient base stood at ~60,000 patients (two thirds of the total 85,000 worldwide), implying about 12,000 US patient additions in 2016, or ~3,000 per quarter.

  • Management guided for “mid to upper teens” YOY US OmniPod growth in 2Q16 – that will be versus a very easy comparison (0.7% growth in 2Q15). Full-year 2016 guidance was maintained for mid-teens US OmniPod growth. This seems fairly conservative in light of the business’ current momentum (29% YOY growth in 1Q16) and an easy upcoming YOY comparison for the year generally. An analyst also pointed out that 2Q16 US OmniPod guidance implies a conservative sequential increase of ~3% from Q1 to Q2, far less than the 9%-12% 1Q-2Q sequential gains Insulet had in 2013-2015. We do point out that guidance is routinely beaten under the new management team.

2. International OmniPod revenue totaled $15.4 million, more than tripling YOY on an easy comparison to abnormally low sales in 1Q15. Sales were flat sequentially from a record-high 4Q15. International performance exceeded the top-end of guidance for $13-15 million in sales. Notably, Ypsomed has begun preparing for OmniPod market entry in France, though management said it was a “small component” of the quarter’s international growth. On the competitive front, the MiniMed 640G is reportedly not impacting the International OmniPod business (as of Medtronic 4Q15 call, the 640G helped drive 65% pump growth in Europe). Said management today, “We don’t see it slowing down” and “Things are progressing nicely.”

  • Management expects $15 million in 2Q16 International OmniPod sales, doubling YOY but flat sequentially. The upcoming YOY comparison will still be easy, as sales declined 33% in 2Q15. Full-year 2016 guidance was maintained for 50% International OmniPod sales growth (~$60 million), which is easily doable if sales remain $15 million per quarter going forward.

3. President of Insulet Diabetes Products Shacey Petrovic said that “between 70-80%” of Insulet’s new patient starts are from MDI, a slight acceleration from the standard “70%” - very good news that the company is still expanding the pump market. Insulet is “well on the way” to growing its worldwide installed base by 20% in 2016, consistent with guidance in 4Q15. This would take the worldwide patient base from 85,000 at the end of 2015 to just over 100,000 at the end of 2016. Approximately two-thirds of the base is in the US, and assuming grow is 20% worldwide, Insulet expects to add ~12,000 patients in the US and ~5,000 patients internationally in 2016.

  • Moving forward, Insulet will give annual patient base growth guidance. This is less detail than in 2015, when management generally gave quarterly patient growth figures. The new management team gives a LOT more granularity than the prior team, though some analysts were clearly not thrilled about this announcement.

4. Total 1Q16 revenue of $81.2 million exceeded guidance ($77 to $80 million) and grew a striking 69% YOY, excluding Neighborhood Diabetes (divested to Liberty Medical for $5 million in cash in February). The OmniPod business supplied 69% of the quarter’s growth, the highest level since 4Q14. Drug Delivery revenue remained strong at $15.1 million, increasing 224% YOY, 3% sequentially, and supplying the remaining 31% of the quarter’s growth.

  • It’s a major positive for Insulet’s overall business, profitability, and focus that the Neighborhood business is out of the picture. The $5 million selling price to Liberty was incredibly low – Insulet’s original acquisition in 2011 was for ~$63 million (!), and the Neighborhood business did ~$14-$18 million per quarter in sales – but this was a smart and necessary strategic decision for the company for a declining and unpopular and unstrategic business. The Neighborhood Diabetes supply business was a low-margin business that did not grow since Insulet acquired it, and its growth prospects were not nearly as good as those for the OmniPod or Drug Delivery. The free-fall in the SMBG market (revenue and profitability) contributed to a very challenging diabetes supply business environment, and the divestment should free management up to focus more on growing the pump market and expanding the OmniPod platform.
  • Management expects 2Q16 revenue of $81-$84 million, implying growth of ~38% at the midpoint (excluding Neighborhood). Full-year revenue guidance was reaffirmed: $330-$350 million (30% YOY growth at the midpoint). Management said exceeding the high-end of the guidance is possible if there is upside in the US and international OmniPod businesses – that seems feasible though the upcoming YOY comparisons will be tougher. On the other hand, no other pumps seem likely to launch this year, so Insulet will not have the noise of new products to contend with.
  • An impressive one-third of all Amgen Neulasta doses in the US are now delivered via OmniPod, up from 25% in 4Q15 and 19% in 3Q15. Management characterized it as “remarkable adoption” and remains pretty thrilled about this business. There has not been commentary on other drug delivery partnerships for some time, so the long-term upside outside of Amgen is unknown.

5. Net loss was $10.7 million in 1Q16, flat with 1Q15’s net loss of $10.4 million, but a significant improvement from 4Q15 (-$27.3 million). Management still hopes to be EBIT positive in 2018. Gross margin was in line with expectations at 54%, up markedly from 45% in 4Q15 and down from a 61% gross margin in 1Q15 (very low international sales in 1Q15 buoyed overall company margins). Management still sees upside to get to 60%+ gross margins long-term – more manufacturing efficiency is needed to get there, and remarks indicated it will take time.

  • Cash stood at ~$112 million at the end of 1Q16, an $11 million decrease from ~$123 million at end of 2015. Management did not comment on cash needs.

6. Insulet recently appointed Dr. Aiman Abdel-Malek as Senior VP of Advanced Technology and Engineering. His strong background should aid Insulet’s greater push into mobile connectivity, apps, software, and diabetes data. Dr. Abdel-Malek will oversee R&D and Engineering and reports directly to CEO Patrick Sullivan. He brings nearly 30 years of healthcare and technology experience, most notably as former VP of Engineering of the Mobile Healthcare division of Qualcomm (where he helped create cloud-based solutions for disease management). Prior to Qualcomm, Dr. Abdel-Malek spent 25 years at GE, including a stint as a General Manager in GE’s Healthcare Services division. He most recently served as President of Frictionless Life Analytics, Inc., advising startups focused on Internet of Things (IoT) platforms and solutions.

  • Medical Director Dr. Howard Zisser’s departure for Verily earlier this month was not acknowledged in prepared remarks. In responding to a direct analyst question, CEO Patrick Sullivan was very gracious: “This was about two weeks ago now. Howard informed me he has taken a job at Google’s – I forgot the name of the company – their healthcare company to be in charge of their clinicals ... I guess it was Verily. So he informed me of that a couple of weeks ago. He heads the part of the company that’s now at Google. We thank him for everything that he's done. He did a great job for us in all of the work he did on artificial pancreas and he really wanted to see the benefits of his labor and we've done that now with our AGC agreement, and Howard did a terrific job for us. And we wish him well with what he’s doing. I think it is a great opportunity for him, quite frankly, in the Google environment. As it relates to replacing him, we are, in the short term, reaching out to our scientific advisors and those in the community to help us, and we are looking to replace Howard as Medical Director in the future – looking to another, obviously, endocrinologist that can help us get smarter about diabetes and guide us in our product development activities as well as our relations with the other constituencies that we deal with. So pretty excited for Howard and gives us an opportunity to hire a replacement for him.” That’s a pretty great leader to respond like that in our view.

Pipeline Highlights

7. “Later this year” Insulet plans to submit a 510(k) for its next-gen Bluetooth-enabled PDM and mobile app, which will display key real-time pump data on the phone AND integrate with Dexcom’s G5 app. No clearance timeline was given, but we assume the end of 2016-early 2017 expectation from JPM still stands. The submission timing is on track with 4Q15, though this project has been running behind for a year – submission went from “end of 2015” (2Q15) to “mid-2016” (3Q15) to now “later this year” (4Q15, 1Q16). We think the greater emphasis on a digital strategy makes sense, though it of course adds development time and requires building new areas of expertise.

  • The new OmniPod PDM might be the first commercialized pump to talk to a phone and integrate with Dexcom’s G5 app. Dexcom’s 1Q16 call yesterday said 2016 submissions are planned for enhanced versions of its G5 mobile app, including “possible” incorporation of insulin data – no specific pump partners were mentioned, though management talked about integration with intelligent insulin pens for the first time (yes!). For comparison, Tandem expects a pivotal trial of its predictive low glucose suspend system this year (using G5), with a potential launch in 2017. Animas has not shared specific G5 integration timing plans. Bigfoot’s automated system will enter a pivotal trial in 2017, though it has talked about potentially launching an interim, non-automated system that talks to a smartphone app (2016).

8. Insulet plans to enter clinical trials “later this year” for its automated insulin delivery system. The company plans to be in the market in “late 2018,” roughly consistent with the timing first shared in 4Q15 (“pivotal study” toward the end of 2017,” implying a subsequent late 2017 or early 2018 FDA submission). Management called it an “aggressive development program,” though the timing puts Insulet later to market than at least Medtronic’s MiniMed 670G (pivotal complete, FDA submission before this July), and potentially others too (see our latest landscape here). On the other hand, there is strong potential to differentiate the OmniPod through the tubeless design and the very strong and proven UCSB algorithm licensed from Mode AGC in 4Q15. Overall, we’re psyched to see Insulet pushing ahead on the AID front – the competition will drive a lot of choice for patients!

  • Management expects the automated insulin delivery product to include a Bluetooth-enabled pod and mobile connectivity. The company is still in FDA discussions about insulin dosing from a smartphone phone app, so we’re not sure what the ultimate artificial pancreas architecture could look like (e.g., control algorithm on the pod itself and talking to a phone or the PDM? Control algorithm on the PDM and talking to the pod and a phone for secondary display?). We think Insulet would be well served to house the algorithm in the pod and have it communicate directly with Dexcom’s CGM, using a smartphone app as the user interface for checking system status and mealtime bolusing (similar to Bigfoot’s strategy, and quite distinct from other companies integrating the algorithm right into the pump).
  • Will Insulet launch interim OmniPod apps between the upcoming Bluetooth handheld (secondary data display) and the automated insulin delivery system? Insulet could presumably launch a non-automated system that replaces the PDM entirely with a smartphone app that talks to the Bluetooth-enabled pod and enables bolusing. That would be a pretty differentiated pump relative to what’s available now. Of course, this approach rests on the FDA’s comfort in patients dosing insulin from a smartphone – feasible but definitely some safety aspects to work out. Theoretically speaking, Dexcom’s G5 app is actually classified as higher risk than a pump (Class III), and it can function as the primary display device – could this impact the FDA’s thinking?

9. Insulet still expects the updated U500 and U200 OmniPod PDMs with partner Lilly to launch in “two to three years.” The ongoing U500 study (n=416) has enrolled half of its patients (up from “one third” in 4Q15), and completion is slated for December – good to see this remains on schedule. Management has never given FDA submission timing on this product. The U200 work has only just begun (it was announced at JPM) and management did not share any trial expectations or timing, though we assume it will heavily leverage the U500 work.

  • Insulet believes the U200 and U500 products can help double the size of its addressable market, which is currently capped at a 200-unit OmniPod (and thus, mostly type 1). As a reminder, these only change the PDM software, since they put the concentrated insulin in the same 200-unit OmniPod – that doubles and quintuples the reservoir size without any manufacturing changes (brilliant!). This will help Insulet stay competitive with Tandem’s 480-unit t:flex (largest reservoir pump on the market). As of Tandem’s 1Q16 update today, it has shipped a total of 1,871 t:flex pumps to date (launched last summer) – small but not insignificant. .

10. Insulet will launch its first patient app this quarter (Q2), allowing customers to reorder supplies and get training or customer support. The app is non-regulated and will be available for both iOS and Android. Management called it the first step in “Digital Insulet, and the company hopes it will improve patient retention. Presumably it will also reduce demands on the internal customer service and supply reordering team. We’re glad to see the timing is on par with the 4Q15 and JPM updates. This app will be separate from the upcoming PDM app discussed above.

Pipeline Summary

Pipeline Product

Timeline

Next-gen Bluetooth-enabled PDM, OmniPod display app, Dexcom G5 app integration on phone

FDA 510(k) filing “later” in 2016

OmniPod Artificial Pancreas

OmniPod with built-in Bluetooth, Dexcom CGM, commercial version of UCSB algorithm [Mode AGC], smartphone app and likely a backup PDM

Clinical trials later in 2016, market launch in late 2018.

Lilly U500 OmniPod PDM

Expected to launch in 2-3 years. Study underway, expected to wrap up in December 2016.

Lilly U200 OmniPod PDM

Expected to launch in 2-3 years

Drug Delivery

- Amgen Neulasta Delivery Kit (oncology)

- Ferring (infertility)

- Capricor (heart failure)

- Other partnerships (obesity, pulmonary hypertension, oncology, and Parkinson’s medications)

 

- Launched

- Launched

- Supplying for phase 2 trial

- No specifics shared

 

-- by Adam Brown and Kelly Close