Insulet 3Q18 – Omnipod to integrate with Tidepool Loop; Horizon launch 2H20 with direct smartphone control; Record sales of $151 million rise 24%; $1.7 million net income! – November 1, 2018

Insulet reported 3Q18 results this afternoon in a call led by CEO Patrick Sullivan, COO/President Ms. Shacey Petrovic, and CFO Mr. Mike Levitz. It was Mr. Sullivan’s final call as Insulet’s CEO – and his 60^th career Wall Street earnings call! – following four very impressive years at the company’s helm. This was a fitting quarter, given Insulet’s record US and OUS Omnipod sales, first-ever net income, access wins in Medicare and Medicaid, and exciting AID pipeline updates. “Operator, I’ll drop the mic and you can drop the curtain.” Well said, Mr. Sullivan, and we wish you the very best in retirement (such as that may be). The talented and very highly-regarded Ms. Shacey Petrovic will become Insulet’s CEO starting January 1, 2019. See the call’s exciting pipeline and financial highlights below!

AID Pipeline Highlights

1. Omnipod first interoperable pump partner for Tidepool Loop, “potentially” faster to market than Insulet’s own Horizon

In a major interoperability victory, Insulet announced today it is the first pump partner for Tidepool’s Loop, meaning the on-body pod will communicate directly with Tidepool’s Loop app (via Bluetooth) and enable hybrid closed loop from a user’s own iPhone (no PDM needed). This effort complements Insulet’s own Horizon hybrid closed loop efforts (see below), gives Omnipod users choice of hybrid closed loop, gives Insulet two AID irons in the fire, and represents a huge win for the DIY community – nice! Loop’s timing is in Tidepool’s hands, though COO Shacey Petrovic noted that this path “could potentially accelerate” Insulet’s time to market with hybrid closed loop vs. Horizon. Given Horizon’s new “2H20” launch timing noted below, this implies Tidepool Loop with direct Omnipod/Dexcom G6 integration could theoretically be on the market in two years – that would be quite fast, as we guessed Tidepool Loop was more like 2-4 years away (read our detailed coverage) – we didn’t know Insulet would move so fast! Ms. Petrovic was clear that this is theoretical timing, but there are many advantages for Tidepool Loop: the DIY Loop app already exists today, is used by over 1,000 people, and “may have faster pathways to market” using real-world data (e.g., HCT-funded observational study expected to begin this month). “The Loop product already works,” Ms. Petrovic noted, “and this potentially offers us some acceleration.” This is also a huge victory for Tidepool, getting one of the world’s largest and most innovative insulin pump makers on board and driving to a truly compelling on-body user experience: a tubeless pod, a CGM sensor, and a user’s iPhone running hybrid closed loop. Lots of things have to go right, however, and it’s hard to know at this point FDA’s approach plus how to answer fully questions related to customer service, etc.

• This is fast following Tidepool’s announcement only three weeks ago that it plans to eventually submit the DIY Loop app to FDA, paving a new regulatory path for automated insulin delivery (AID). If all goes as planned, Loop will be made available as an officially supported, FDA-regulated mobile app on the iOS App store, rather than the current DIY version that only works with out-of-warranty Medtronic pumps, Dexcom’s G4/G5/G6 CGM, and Medtronic’s older Enlite CGM. Tidepool aims to make Loop broadly available on the iOS App Store, compatible with commercially available, in-warranty, interoperable, integrated insulin pumps (of which Insulet would be the first) and CGMs (iCGMs). The current thinking is to submit Loop under a de novo iAlgorithm/iController pathway, allowing users to download it and run AID on their smartphone with interoperable devices.

• Insulet has now drawn a line in the sand as the first pump company that plans to integrate with Tidepool Loop. We’d guess other pump companies will approach this from a variety of perspectives. Tandem is an obvious candidate (no different from several weeks ago).

• Ms. Petrovic wouldn’t comment on whether Insulet will submit as an “iPump” like Tandem’s t:slim X2. She noted, “The system today, Dash, is designed to be interoperable, and we fully expect to take advantage of all regulatory pathways for Horizon and Tidepool Loop.” Presumably Insulet does not have to do this, though much will depend on what the “special controls” and iPump pathway end up looking like. Unlike Dexcom, who worked with FDA to define the iCGM path, multiple companies are certainly in the running for defining the iPump path.

2. Horizon hybrid closed loop launch in “2H20,” now with direct smartphone control; FDA breakthrough device designation; 4^th study on real-world use prior to pivotal

Insulet’s Horizon hybrid closed loop is now expected to launch in “2H20,” with direct user smartphone control confirmed for the first time ever today – i.e., the algorithm will be on the pod, a Dexcom G6 sensor will talk to the pod, a user will remain in closed loop when the phone is out of range, and a user will interact with the system (including bolusing) direct from Insulet’s app on his/her own smartphone. Nice! Notably, Horizon “was recently granted designation in FDA’s breakthrough device program,” enabling an expedited development path and “accelerated review and approval.” The positioning of this statement today made it seem like the designation related to the direct smartphone control aspect paired with hybrid closed loop on the tubeless pod. As a reminder, the MiniMed 670G had a “priority review” of three months, though the FDA and Medtronic worked together for over two years on the path; we assume something similar is likely here, and it’s great to see the timing specificity. It was some time from approval to launch of the 670G.

• The 2H20 launch represents an ~3-6-month delay from 2Q18’s plan for an end of 2019 to early-mid 2020 launch for Horizon; however, it is a great tradeoff to firmly shoot for direct smartphone control at launch. Insulet does not plan to launch smartphone control before Horizon, which makes sense: Dash’s market release is early next year (2019), and this means Horizon with smartphone control is only ~15-18 months behind that.

• Competitively, this puts Insulet about a year behind Tandem’s Control-IQ (summer 2019 launch), but is otherwise on par with 2020 launch plans for Bigfoot (also planning smartphone control) and Beta Bionics. Lilly’s only timing so far has called for its hybrid closed loop to launch between late 2019-late 2020, and we’d guess more the latter given no recent updates. We’ll be updating our AID competitive landscape next week.

• A fourth IDE study (pre-pivotal) of Horizon will soon test real-world, challenging scenarios with missed/large meals, exercise, etc. The study aims to enroll 20-30 people, which should make it fairly fast to complete. Ms. Petrovic did not share expected start/completion, though this IDE study will come before a pivotal, putting the latter firmly into 2019. We’re glad to see this continued commitment to clinical data (Dr. Trang Ly is amazing), which also parallels the stepwise approach the Beta Bionics team has taken. Bigfoot has relied on simulation/modeling so far, with just one clinical study done so far before its planned pivotal next year.

• For smartphone control, Insulet will obviously have to do human factors studies, though all of this will port over nicely from the existing Horizon work on the Dash handheld. Management noted that direct smartphone control has repeatedly been users’ #1 innovation request, and Insulet appears to be very focused on addressing the technical, regulatory, and security barriers. Said Ms. Petrovic in Q&A, “Yes, it will be from pod to phone, and we can take Dash out of the equation. Nobody can match this. We’re eliminating a device a patient is carrying, and only Omnipod is positioned to do that super well. We’re working hard to get this out as quick as possible.”

• Omnipod Dash is the first pump evaluated under Diabetes Technology Society’s “DTSec,” signifying it meets a cybersecurity standard via an independent expert evaluation. See the DTS press release here, which notes, “DTSec leverages ISO/IEC 15408 to provide a framework for risk-based, multi-stakeholder definition of security requirement ... DTSec-approved labs evaluate the products against the prescribed security requirements. DTSec certifications provide users of connected diabetes devices with confidence that the products include the security protections claimed by its developers. Insulet Corporation’s Omnipod Dash System was evaluated by TUV Rheinland, a DTSec-approved security testing lab.” We’re not sure if other pump/CGM companies will also go through this testing process to receiver the “DTSec” stamp of approval.

Dash, Pharmacy Model, and Medicare Highlights

1. Omnipod Dash to launch in pharmacies in early 2019, free PDM = no upfront cost, pay-as-you-go model; Limited market release underway, targeting 1,000 users, 100 prescribers

Insulet’s Omnipod Dash system will broadly launch in the US in early 2019, with the primary focus on pharmacy distribution. Notably, the PDM will have no upfront cost, lowering the barriers to start on pump therapy and a true pay-as-you-go model for payers. The pharmacy focus on free PDM were confirmed today for the first time, a big update and very patient-friendly move – even a $299 fee would have been a lot for many and slowed down the transition/uptake. Kudos to Insulet! While shifting to pharmacy has been a clear goal for Insulet in 2018, especially after Medicare Part D designation in January, today’s call confirmed payer conversations for Dash have taken place with pharmacy distribution in mind. Remarkably, Insulet expects to launch the Dash system with over 100 million covered lives in the pharmacy, and it is already at over 75 million covered lives with the payer conversations to date. One of the big payer tailwinds has been the move to no upfront cost for the PDM, with slightly higher pricing per pod. Overall, this is expected to be revenue neutral for Insulet over the course of a year, though in the short-term it presents a slight revenue headwind. Still, this is absolutely the right move for patients and HCPs (less hassle), payers (less upfront risk), and for Insulet (much less costly to serve the pharmacy channel).

• Omnipod Dash has received “incredibly positive” feedback in the limited market release so far, which commenced in July following FDA clearance in June. Insulet expects to engage 1,000 users and 100 prescribers in the Dash limited market release before the broader early 2019 launch commences. The Bluetooth-enabled pod, touchscreen PDM (locked-down Android phone), secondary display iOS apps, and paired Ascensia Contour Next One BGM are a big step up over the current system for many patients, as we’ve covered throughout this year. Of course, some patients do not want the extra device so are not as enthusiastic.

• Developing the pharmacy channel brings several competitive advantages for Insulet:

  • For patients, it provides a better customer experience, lower out-of-pocket, and no upfront fee to get started on pump therapy.

  • For physicians, Omnipod becomes a simple e-prescription, meaning far less burdensome paperwork and documentation.

  • For payers, the pharmacy offers a risk-sharing model, since its pay-as-you-go for Insulet (no sunk cost upfront like for other pumps).

  • For Insulet, the pharmacy is a less costly channel to serve vs. DME, plus management believes it is less burdensome  

2. Almost 1/3 of Medicare Part D covered lives for Omnipod, 1,000+ beneficiaries already qualified through exception path; 45% of all Medicaid covered lives have Omnipod access

On the Medicare Part D front, progress is impressive: at the end of September, “almost 1/3 of Medicare Part D covered lives” were covered for Omnipod and Omnipod Dash, including Optum (newly added), Express Scripts, and Magellan.  The coverage officially starts on January 1, 2019, though over 1,000 Medicare beneficiaries have already gained Omnipod coverage through the exception process, with an impressive >80% success rate. Management said users can select a Medicare Part D plan that covers Omnipod, and if they don’t want to do that, they can pursue the exception process – awesome news, given the multi-year fight to get this through CMS. Medicare coverage is not expected to ramp much further before 2019, implying the agreements Insulet has in place now are likely to be the ones that launch on January 1, 2019.

• Insulet also continues to strengthen Medicaid coverage, now with 33.5 million covered lives (45% of all Medicaid covered lives) with Omnipod access. This is an impressive 10% expansion from 2Q18, where the number stood at ~30 million. Medicaid access is expected to continue to grow in Q4 and throughout 2019.

3. CE Mark received for Dash (not yet publicized); working through launch plans now

Insulet has already received a CE Mark for the Dash system in Europe, an under-the-radar update that only came up in Q&A. COO Shacey Petrovic was caught slightly off guard by the analyst (Danielle Antalffy) and noted that Insulet has not yet publicized the news, as the team is still working through launch plans. Per Keystone 2018, a global expansion for the Dash PDM is expected in “2H19,” which seems very reasonable assuming translations and manufacturing supply is ready.

Financial and Business Highlights

1. Record sales of $151 million, rise 24% YOY; OUS sales of $50 million rise 55%, supplying 61% of Q3 growth; US sales of $82 million rise 17%

• Insulet reported record worldwide sales of $151 million in 3Q18, rising 24% YOY and 22% sequentially. The gain came on a tough YOY comparison (+28% in 3Q17) and represented Insulet’s highest sales ever by an impressive $21 million – the previous record was 4Q17’s $131 million in sales. The OUS business rebounded strong after a rough 2Q18 (inventory issues): sales of $50 million rose 55% YOY and carried 61% of Insulet’s Q3 growth. Worldwide sales came on the upper-end of guidance ($144.5-$151.5 million), as we’ve come to expect from this team. It was impressive to see record sales alongside record profitability (see below) and the meaningful pipeline progress – quite a final call for CEO Patrick Sullivan.

  • Management affirmed Q2 expectations for >20% installed base growth in 2018 – adding 30,000 users globally – with some additional enthusiasm for the US. The US Omnipod user base is expected to rise 18%-20% in 2018, adding ~15,000 users and bringing the total US base to ~91,000-96,000 users by end-of-year; today, management said the upper end of the range is to be expected in the US. The OUS base is still expected to rise 20%-25%, also adding ~15,000 users and bringing the total to ~76,000-81,000 by the end of 2018. This would bring the 2018 global installed base to ~167,000-177,000 users.

• Record-high US Omnipod sales of $82 million grew a solid 17% YOY and 5% sequentially. This marks two straight record US sales quarters, a nice sign of momentum in the competitive US pump market. US Omnipod provided 39% of Insulet’s overall Q3 growth, a downtick from Q2 when the international business was much weaker. Still, management noted 3Q18 in the US saw “another quarter of record new patient starts,” and patient base growth of 18-20% YOY is still expected for the US for full-year 2018.

• International Omnipod had a blowout record quarter: sales of $50 million rose 55% YOY on a difficult comparison (+70% in 3Q17). This smashed the previous record $38 million in OUS Omnipod sales in 1Q18. After the inventory channel issues in 2Q18 – when OUS sales were just $29 million, +7% YOY – it was great to see this segment rebound with robust 76% sequential growth. This is near the expected run rate for the OUS business moving forward (>$200 million per year), now that Insulet has taken over direct Omnipod distribution from Ypsomed (started July 1, 2018).

  • Notably, Insulet’s Europe team is nearly 120 people, and management is now confident in its ability to not only serve the market, but accelerate growth. The OUS business is growing much faster than the US business right now; it will be interesting to see how the trajectories look in 2019, as Insulet’s Dash should provide additional tailwind in the US. We see pump therapy becoming more popular in the EU as the field moves closer to automated insulin delivery.

2. 2018 Guidance raised to $558-$563 million, +21% YOY; US Omnipod +18%, OUS OmniPod +43%, Drug Delivery -5%

Following a significant drop in 2Q18, management raised full-year revenue guidance: sales are now expected at $558-$563 million, rising 20%-21% YOY. This represents an $11 million increase on the bottom-end and a $1 million increase on the top-end from the previous $547 to $562 million. The updated full-year figure includes: a tightening in US Omnipod revenue to $320-$321.5 million (+18%); a $6 million raise on the bottom-end for international Omnipod revenue, now expected at $169.5-$172 million (+41%-44%); and a ~$4 million raise in drug delivery guidance, now at $68.5-$69.5 million for the year (down 4%-5%)

• In 4Q18, Insulet expects its second straight quarter of record sales: $159-$164 million, rising 22%-26% YOY and 7% sequentially. That figure includes record US Omnipod revenue of $89.5-$91 million (+17%-19%), international Omnipod revenue of $52.5-$55 million (+47%-54%), and drug delivery revenue of $17-$18 million (down 2%-7%).

3. Huge profitability win: first net income ($1.7 million) in Insulet’s history! Impressive gross margin of 67.5%, up from 60.5% in 3Q17

In a record quarter for profitability, Insulet reported its first-ever net income of $1.7 million and a remarkable gross margin of 67.5%. Compared to one year ago, both metrics moved nicely: net loss was $2.2 million and gross margin was 60.5% in 3Q17. Operating income also tripled, up to $6.9 million from $2.0 million in 3Q17. Insulet remains on track for positive operating income for the full-year 2018, also a first in its history. The profit margin expansion was attributed to continued manufacturing/operational efficiencies, alongside going direct in Europe. Under CEO Patrick Sullivan, this team has made remarkable progress on profitability – when he joined four years ago, Insulet’s gross margins were under 50%! Full-year 2018 gross margins are expected at 65%-66%, an impressive increase from ~60% for all of 2017. Management said the 2021 gross margin target of 70% remains on track, even with some near-term disruption in 2019 as the new highly automated US manufacturing facility comes online. It’s not Novo Nordisk at 84%, but it’s pretty high ….

4. CEO Patrick Sullivan’s final call; COO Shacey Petrovic to become CEO starting January 1

In his final call as Insulet’s CEO, and the 60^th Wall Street earnings call of his career, CEO Patrick Sullivan was gracious, enthusiastic, and grateful. See his comments below, which truly reflect the remarkable progress in a very short period of time. As we covered in September, talented and very highly regarded President/COO Shacey Petrovic will become Insulet’s CEO starting January 1, 2019. Mr. Sullivan has achieved a remarkable amount at Insulet, making several leadership changes early in his tenure and putting the company on a remarkable track – record revenue, pivoting to profitability, building a strong pipeline, dramatically improving access (Medicare, Medicare), and more. We are sad to see him retire but agree that Insulet is in extremely capable hands with Ms. Petrovic.

• “When I joined Insulet four years ago, I was attracted to an amazing product and technology. Insulet revenues were roughly 200 million, gross margins were less than 50%, market access was very limited, we were only direct in the US, and we were losing money. We assembled an extraordinarily talented team. When I retire, we’ll have more than doubled revenue, gross margin is closing in on 70%, we have Medicare and Medicaid access, we’ve gone direct in Europe, and we have a rich and exciting pipeline. Most of all, Insulet has made the pivot to profitability. To say we’ve come a long way in four years is an understatement. We are significantly improving the lives of people with diabetes, and as amazing as the ride has been, there are so many more exciting opportunities to seize and patients to serve. I’m highly confident in the amazing capability of this fantastic team. For me, it has been a great privilege and honor over the past four years, and I believe the best years lie ahead for Insulet. Shacey has been a great COO and will be an outstanding CEO. She is, without reservation, the right person to lead Insulet’s next phase. I want to thank our employees, the Board of Directors, the Podder community, and Insulet shareholders for your confidence and trust. Thank you for the opportunity.”

U500, U200 Pipeline Highlights

1. U500 Omnipod: “still working” with Lilly to get over the finish line on FDA submission; “making good progress” on U200

Insulet is “still working” with Lilly to submit the U500 Omnipod to the FDA, following the positive pivotal data presented at ADA. The most recent timing shared several quarters ago called for a 2019 launch of U500 Omnipod, and that had been further delayed from a first half 2019 expectation back in 2016. Obviously, progress will depend on the FDA submission timing and speed of review – presumably it will be an in-depth review, though we’re not sure. Meanwhile, the U200 Omnipod is “making good progress,” though no timing was shared today. The 2Q18 call expected this to launch “toward the end of 2020 or 2021,” back from February guidance for a 2020 launch.

• Notably, Ms. Petrovic said Dash is testing extraordinarily well in the type 2 segment, and phone control “might arguably be just as, if not more, meaningful for unlocking the type 2 population.” In other words, though the custom concentrated insulin systems are taking an extraordinarily long time, the near-term Dash system with U100 and 2H20 phone control could help with some uptake in the type 2 market…

--by Adam Brown and Kelly Close