Insulet 3Q20 – Record revenue of $234 million, rising 22% YOY on “stronger than expected” new starts; Omnipod Dash continues to drive momentum in pharmacy, type 2s, and MDI; Omnipod 5 reiterated for limited US launch in 1H21 – November 4, 2020

Insulet reported its 3Q20 financial results this afternoon on a call led by CEO Ms. Shacey Petrovic and CFO Mr. Wayde McMillan. See our top highlights below.

Financial and Business Highlights

1. Record total revenue of $234 million, rising 22% YOY (+20% operationally) on “stronger than expected” new starts; US Omnipod revenue of $132 million (+21% YOY); International Omnipod revenue of $80 million (+12% YOY)

Insulet reported record total 3Q20 revenue of $234 million, rising 22% YOY (+20% operationally) on a tough comparison to 27% YOY growth in 3Q19. Insulet continues to outperform guidance: this quarter, revenue came in ~$9 million above the high end of the guidance range given in August. The guidance beat was driven by a ~$6 million beat in worldwide Omnipod revenue and ~$3 million beat in Insulet’s Drug Delivery business. Total Omnipod revenue 20% YOY, as reported (+18% operationally), to $212 million. US Omnipod revenue drove 54% of growth in the quarter. Despite lingering COVID-19 impact, 3Q20 marked the ninth straight quarter of >20% YOY revenue growth for the company.

• New patient starts in the quarter were “stronger than expected.” Due to COVID-19, Insulet had lowered its guidance for new patients starts in 3Q20 by 30%-50% from pre-COVID-19 expectations, but during today’s call Mr. McMillan shared, “Our results were favorable in both the US and international regions with the combined impact [of COVID-19] slightly less than 30% (i.e., the optimistic end of guidance)...both the US and international had significant sequential improvements resulting in approximately half the impact in Q3 versus Q2.”

  • During Q&A, analyst Jeff Johnson (Baird) said that US new patient starts in 3Q19 were “almost at parity with last year,” and new OUS starts were down “marginally, maybe 5%-10% YOY.” While Mr. McMillan declined to share a specific absolute number of new patient starts, he acknowledged that Mr. Johnson’s estimate was “pretty close,” and slightly worse.Earlier, another analyst Robbie Marcus (JP Morgan) noted that Insulet seems to be slighter greater impact on new starts from COVID-19, relative to its competitor, Tandem. Presumably, Mr. Marcus was referring to trends seen in 2Q20, in which Tandem saw a relatively small 12% YOY decline in pump shipments, despite COVID-19. Tandem will give its 3Q20 update tomorrow afternoon and we’ll be keeping a close eye on these numbers.

• US Omnipod revenue came in at $132 million, rising 21% YOY on a tough comparison to 34% YOY growth in 3Q19. US Omnipod sales growth easily exceeded the guidance range of 14%-16%. Sequentially, US Omnipod sales grew 3%. Omnipod DASH continues to constitute the majority of new patient starts in the US, accounting for “approximately 65%” of new starts in the US in the quarter. Additionally, the pharmacy channel continues to be grow, now representing “over 30%” of total US volume. On today’s call, Insulet also shared that approximately “approximately 80%” of new patient starts in the US are coming from MDI and “approximately one-third” of new users were type 2s – both numbers are consistent with past percentages.

• International Omnipod revenue was reported at $80 million, rising 18% YOY (+12% operationally). OUS Omnipod sales also exceeded prior guidance for 9%-11% YOY growth. According to Mr. McMillan, this overperformance on guidance was “primarily due to better than expected new customer starts.” Similarly to many other companies, Insulet is experiencing a slower recovery in Europe compared to the US, but Insulet is making up ground. Helping drive the recovery is broad commercial roll-out of Omnipod DASH in European markets. According to Ms. Petrovic, “now 100% of our new customers in Europe start on Omnipod Dash”; to our knowledge, Insulet still plans to support existing customers on non-Dash Omnipod. During prepared remarks, Ms. Petrovic also commented on future international plans referencing “five new markets” Insulet plans to enter by “early 2021”; one of those, Belgium, has already been launched in early 4Q20, but it’s unclear what the other four markets are.

• Drug Delivery finished the quarter with $22 million in revenue, up 47% YOY and outpacing guidance for 23%-28% YOY growth. The 47% YOY growth does come on a very easy comparison to a 21% decline in 3Q19. In 2Q20, we heard from Ms. Petrovic that drug delivery had grown in response to patients desiring in-home delivery of medications during the pandemic and that “[the revenue jump] is durable to the extent the pandemic is durable.”

2. Full-year guidance raised by ~$18 million at midpoint to 20%-21% YOY growth (implied FY20 revenue of ~$885-$893 million); gross margin guidance increased to “approximately 64%”

Despite COVID-19 headwinds, Insulet once again raised its total revenue growth range guidance to 20%-21% from 17%-19%. This increase implies full year 2020 revenue of $885-$893 million and a ~$18 million raise at the midpoint. Impressively, today’s updated guidance exceeds Insulet’s pre-COVID guidance from the beginning of the year of 15%-19% YOY growth. The guidance ~$18 million guidance raise comes off a ~$22 million guidance raise last quarter. Omnipod revenue is now expected to grow 21%-22% for FY20 with US Omnipod growth guided at 23%-24% and international Omnipod growth of 18%-19%. Drug Delivery also saw a slight increase in guidance to 4%-6% growth for FY20. Following this updated guidance Mr. McMillan stated “we now expect that global customer new starts for the full-year of 2020 will improve to approximately 75% of our beginning of the year estimate.”

• During prepared remarks, Mr. McMillan also announced an increase in gross margin guidance for FY20 to “approximately 64%,” rising from “approximately 63%” in 2Q20 guidance. Included in this guidance is the “headwind of $9 million to $10 million or approximately 100 basis points [i.e., 1%] of estimated onetime costs related to COVID safety and mitigation efforts versus our prior guide of $7 million to $10 million.” Despite the slight increase in COVID-related costs, Insulet is continuing to improve gross margin, which according to Mr. McMillan is on track for the 2021 goal of 67%-70%, barring higher than expected lingering impacts from COVID-19 in 2021.

• In 4Q20, Insulet is guiding for revenue growth of “7% to 11%,” driven by Omnipod growth of 10%-14%. That would imply 4Q20 revenue of $223-$232 million, just under 3Q20 revenue. Of course, if Insulet continues to outpace its guidance, 4Q20 would represent another record quarter in revenue. New patient starts for 4Q20 are expected to be down “15%-25%” compared to pre-COVID expectations, an improvement from the 25% impact Insulet was guiding for on its 1Q20 and 2Q20 calls.

• During Q&A, Mr. McMillan addressed the question of Insulet’s “conservative approach to guidance” saying “I’ll take that [conservative guidance] every time because we held guidance and we did it because we wanted to make sure people understood our business model and that we could articulate our business by putting stakes in the ground and adding additional metrics so we could talk about it.”

3. Net income of $12 million; gross margin of 65%; $897 million in cash and short-term investments with $130 million raise in 4Q20

Insulet reported a net income of $12 million in the quarter, compared to a net income of less than $1 million in 3Q19. The $12 million in 3Q20 follows $14 million net income reported in 2Q20. Operating expenses in the quarter grew 21% YOY to $128 million – this was driven by increased spending on both R&D (+24% YOY), presumably related to Omnipod 5, and selling, general, and administrative expenses (+19% YOY), primarily on marketing.

• Gross margin in 3Q20 came in at 65%, increasing slightly from 64% in 3Q19. Insulet has reported fairly consistent gross margin numbers for the last eight quarters, all coming between 64% and 67%. In 3Q20, there was a 0.6% gross margin boost from currency effects that was offset by 0.6% gross margin headwind from COVID-19 related costs. Insulet remains on track to achieve its gross margin goal of 67%-70% by FY21.

• At the end of 3Q20, Insulet had $897 million in cash and short-term investments. On today’s call, Mr. McMillan also shared that “subsequent to Q3,” Insulet raised an additional $130 million in cash. This would put Insulet likely at more than a billion in cash and short-term investments; certainly, a lot of this will be used to support Insulet’s investments in manufacturing, R&D, and sales force and international expansions.

4. New contract manufacturer in China with two lines not yet producing sellable product; third highly automated line at US manufacturing plant “nearing completion” for installation

We heard a number of updates from Insulet on manufacturing, most notably that the company has invested in another contract manufacturer in China. As a reminder, Insulet already has a manufacturer partner in China. The new manufacturer will have two production lines, which are already “up and running,” though not yet producing sellable product. The new contract is part of Insulet’s efforts to not only expand its manufacturing capacity, but also build redundancy. As there’s no product coming off the line yet, the new manufacturing site did not impact cost of goods sold in 3Q20, though Mr. McMillan estimated that the new site would have an impact “either later this year or in early 2021.”

• At the new US manufacturing facility, a third highly automated line is now “nearing completion” of installation. This appears to be on track with previous plans to get a third line up and running in “2020.” The second US manufacturing line starting producing product in 1Q20 and, to our knowledge, is currently ramping production. Eventually, Insulet aims to have four highly automated manufacturing lines up and running at its Acton site, part of a $200+ million investment to move Insulet’s global headquarters to Acton, MA. The US lines are expected to be a key driver for Insulet to reach its long-term gross margin goals, though Mr. McMillan shared on today’s calls that the cost of goods sold for Omnipods coming out of the US manufacturing lines are currently higher than those coming out of the Chinese lines. Of course, when all four lines are up and running, that trend will reverse.

Omnipod Dash Highlights

1. “65-70%” of US lives now covered; Dash represents ~65% of US new customer starts this quarter; “approximately one-third” of new adds are type 2s and “about 80%” from MDI; “over 30%” of US total volume now through pharmacy channel

In 3Q20, Omnipod Dash drove “approximately 65%” of new US patient starts, in line with numbers from 2Q20 and 1Q20. The growing adoption of Dash comes with expanding US coverage; at the end of 3Q20, “65% to 70%” of US lives were covered. This is an increase from “approximately 65%” in 2Q20 and “over 60%” in 1Q20. We again did not hear updates on Medicare and Medicaid beneficiaries, but as of 1Q20, “over 50%” of Medicare and “approximately 70%” of Medicaid beneficiaries had coverage for Dash. The pay-as-you-go, primarily pharmacy access, no upfront-cost, Omnipod Dash system is driving a number of positive trends for Insulet:

• Driven by dash, “over 30%” of Insulet’s US volume is running through the pharmacy channel. Although this is the same phrasing given in 2Q20, during Q&A, Mr. McMillan clarified that this is actually a slight “couple percentage point” increase from 2Q20, but was just “keeping it rounded.” The “over 30%” figure in 3Q20 and 2Q20 compared to “almost 30%” in 1Q20, “over 25%” in 4Q19, “over 20%” in 3Q19, 15%-20% in 2Q19, and 10%-15% in 1Q19. During today’s call, Ms. Petrovic cited Omnipod Dash’s simple onboarding and virtual training experience, low co-pays (“the vast majority of our patients are accessing Omnipod for less than a $50 co-pay”), and lack of large upfront costs as the key drivers in the pharmacy channel. Getting into the pharmacy channel is also a win for Insulet, where there is less paperwork and higher per-patient revenue. With pharmacy access, Insulet has also been marketing Omnipod Dash as the “only entirely virtual end-to-end patient care platform,” starting with electronic prescribing through the pharmacy channel, virtual training, and remote software updates and data uploads.

• “Approximately one-third” of new US new starts were patients with type 2 diabetes, up slightly from 2Q20 and 1Q20 when the figure was “approximately 30%.” The vastly under-penetrated type 2 market continues to be a big part of Insulet’s long-term strategy. Management believes that both the pharmacy channel and DTC marketing will be particularly effective in opening that population, especially as CGM continues to expand and demonstrate the need for better insulin delivery systems. The appeal of the type 2 market is not hard to understand, as the type 2 market on prandial insulin is far larger than the type 1 market (see Dexcom’s estimate for the total markets here).

• “About 80%” of new US customers come from MDI. This is in line with the figure from 2Q20 and 1Q20, suggesting this figure is holding steady, despite the transition to virtual trainings during the COVID-19 pandemic. It’s worth noting that Tandem typically sees about half of their new users come from MDI, meaning Insulet is doing an excellent job expanding the overall pump market.

• In September, Insulet began driving awareness of Dash through a small DTC marketing pilot. During Q&A, Ms. Petrovic shared on DTC marketing that “it’s clear from the early numbers that we’ve made an impact on awareness. […] What we’re now looking at is just how does that awareness convert into actual customers over what period of time and to what degree.” Insulet also sees the DTC efforts as an opportunity to learn about the most effective messaging and channels before launching Omnipod 5.

2. “Very bullish” about long-term international market expansion strategy; Dash will expand into five new markets by “early 2021”; “100% of new customers in Europe start on Dash”

Although international markets have seen slower recovery due to the COVID-19 pandemic, Insulet is “very bullish” about its long-term international market expansion strategy. Excitingly, Insulet announced full commercial rollout of Dash in September, ahead of schedule based on 2Q20 expectations to roll Dash out in “early 2021.” Worth noting, “now 100%” of new customers in Europe start on Omnipod Dash; to our knowledge, Insulet still plans to support existing customers on non-Dash Omnipod. During the call, management reiterated that five international expansions will be completed by “early 2021,” a delay from pre-COVID expectations to enter the markets this year. One of these markets is Belgium, into which Dash already expanded in September. The other four markets are yet to be identified. Per Ms. Petrovic, their identities will be disclosed once Dash is set to enter.

Pipeline Highlights

1. Omnipod 5: US pivotal complete, limited launch maintained for “the first half of this coming year”; pre-school pivotal now underway; two-month type 2 feasibility trial began enrollment in September

Ms. Petrovic’s prepared remarks offered several updates on the timeline for Insulet’s Omnipod 5 hybrid closed loop system. At EASD 2020 in September, we learned that the three-month US pivotal study (ages 7+) was complete. As a reminder, we saw the strong pre-pivotal data at ADA 2020, which highlighted particularly strong usability and hypoglycemia results. During today’s call, Ms. Petrovic shared that “virtually all” pivotal trial participants remained on Omnipod 5 in the pivotal’s extension phase, both suggesting high satisfaction with the system and providing additional data on Omnipod 5’s value to bring to payers and clinicians. Notably, Ms. Petrovic also reiterated that Omnipod 5 remains “on track to launch in the first half of this coming year.” Omnipod 5 will begin with a limited market release, followed by a ramp up through the rest of 2021, the speed of which will depend on the success of the limited release, market access, manufacturing capacity, and customer feedback. During Q&A, Mr. McMillan noted that this means Omnipod 5 will not have a material impact “until the second half of the year [2021].”

• Insulet did not disclose when they would read out the US pivotal, when they intend to submit to the FDA, nor expect FDA clearance. Insulet had planned to read out the data at ATTD 2021 in February (“We had a great forum with ATTD and our clinical investigators being invited to share the data”), but given that ATTD has been delayed to May, Insulet is now looking for an alternative forum to share its data publicly. When asked when we might expect to see the data, Ms. Petrovic offered interesting commentary, noting that “we don’t want to get the data out ahead of” the FDA submission, “and maybe ruffle feathers at the FDA.” Ms. Petrovic further shared that the company will not notify the public when Omnipod 5 is submitted to the FDA (with the dossier expected to be “somewhere around 30,000 to 40,000 pages”), only when it is cleared.

• Ms. Petrovic stated that she doesn’t anticipate COVID to slow down Omnipod 5’s US launch in 2021 because the onboarding and user experiences have been designed to be simple enough that more hands-on, in-person training will not be necessary. Notably, a pre-school pivotal (ages 2-6, n=80) is now underway and all participants have started on the system. Insulet aims to use the trial expand the expected FDA indication to ages 2+ “by the end of 2021.” Management still is yet to offer a timeline on an international rollout of Omnipod 5, although during Q&A, Ms. Petrovic shared that work is “underway” and that Insulet is “fully committed” to bringing Omnipod 5 to all its European and international markets.

• During her prepared remarks, Ms. Petrovic announced that a two-mouth feasibility study (n=30-40) of Omnipod 5 in type 2s began enrollment in September after the FDA accepted the trial’s protocol. Ms. Petrovic positioned the trial as an “early step” in an eventual label expansion for the AID system to type 2s. For now, the trial will help inform Insulet’s tweaking of the algorithm for type 2s. As noted above, Insulet is quite bullish about expanding into the type 2 market and “approximately one-third” of new US adds this quarter were type 2 patients. Ms. Petrovic believes that “Omnipod’s form factor, pay-as-you-go model in the pharmacy, and our experience developing exceptionally simple products positions us uniquely to grow Omnipod use among type 2s.”

• Insulet is also working to advance its collaborations with Dexcom and Abbott ahead of Omnipod 5’s launch in 1H21. The company is also working to make Omnipod 5 compatible with iOS and continues to “advance” its algorithm’s simplicity and ease of use for future Omnipod models.

--by Hanna Gutow, Katie Mahoney, Albert Cai, and Kelly Close