Insulet Corporation (NASDAQ:PODD) Q3 2023 Earnings Call Transcript

Insulet Corporation (NASDAQ:PODD) Q3 2023 Earnings Call Transcript November 2, 2023

Insulet Corporation beats earnings expectations. Reported EPS is $0.71, expectations were $0.4.

Operator: Good afternoon, ladies and gentlemen, and welcome to the Insulet Corporation Third Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder this conference call is being recorded. I would now like to turn the conference over to your host Deborah Gordon, Vice President Investor Relations.

Deborah Gordon: Thank you. Good afternoon and thank you for joining us for Insulet's third quarter 2023 earnings call. With me today are Jim Hollingshead, President and Chief Executive Officer; and Lauren Budden, our Interim Chief Financial Officer and Treasurer. Both the replay of this call and the press release discussing our quarterly results and our guidance will be available on the Investor Relations section of our website. Also on our website is our third quarter supplemental earnings presentation. We encourage you to reference that document for a summary of key metrics and business updates. Before we begin, we would like to inform you that certain statements made by Insulet during the course of this call may be forward-looking and could materially differ from current expectations.

A doctor demonstrating how to use the medical device to a patient with diabetes.

Please refer to the cautionary statements in our SEC filings for a detailed explanation of the inherent limitations of such statements. We'll also discuss non-GAAP financial measures with respect to our performance, namely adjusted gross and operating margins, adjusted EBITDA and constant currency revenue, which is revenue growth excluding the effect of foreign exchange. These measures align with what management uses as supplemental measures in assessing our operating performance and we believe they are helpful to investors, analysts and other interested parties as measures of our operating performance from period to period. Additionally, unless otherwise stated all financial commentary regarding dollar and percentage changes will be on a year-over-year reported basis with the exception of revenue growth rates, which will be on a year-over-year constant currency basis.

With that, I'll turn the call over to Jim.

Jim Hollingshead: Thanks Deb. Good afternoon and thank you for joining us. Q3 was another strong quarter for Insulet with rapid growth and achievement of many strategic milestones. Thanks to our global team's execution, dedication and focus we are on track to complete another transformational year and enter 2024 with significant momentum. On today's call, I want to do three things; discuss our financial results and market traction provide an update on our continuing progress in clinical and market access work, and review key developments in our innovation pipeline. Our third quarter revenue exceeded our expectations with total Omnipod growth of over 27% including US growth of 35%. We also achieved total company growth of 25%.

These are remarkable results especially coming in the context of our strong prior year comparables. As a result, we raised guidance once again for the full year. Performance was driven primarily by the huge success of Omnipod 5, our revolutionary automated insulin delivery system. It is gratifying to see the positive impact Omnipod 5 is having as it continues to simplify and improve the lives of people with diabetes and we are only in the early innings. Q3 represented the anniversary of the US launch of our Omnipod 5 platform. Omnipod 5 is the only FDA-cleared fully disposable pod-based AID system and it continues to transform diabetes management. Its simplicity, ease of use, widespread and affordable access and improved real-world outcomes have made Omnipod 5, the leading AID offering on the market.

With the added benefits of US pharmacy channel access pay-as-you-go model and an easy onboarding pathway, Omnipod 5 makes it simple and efficient for health care practitioners, patients and payers to conveniently prescribe access and afford our breakthrough technology. We are now also beginning the global rollout of Omnipod 5 in our international markets starting with the UK this past June. With one full quarter under our belts in the UK we are seeing very strong early adoption. In Q3, Omnipod 5 drove accelerated new customer starts in the UK taking revenue growth to almost 45% year-over-year and driving approximately 70% sequential growth in new customer starts. It's a strong early sign of the global power of Omnipod 5 to transform diabetes care.

During Q3, we also commenced the rollout of Omnipod 5 in Germany in August and early momentum is exciting. Based on these results, we are confident that Omnipod 5 will emerge as the market-leading offer everywhere it is available. The success of Omnipod 5 led to another outstanding quarter of new customer starts both in the US and globally. In the US, Omnipod 5 continue to represent the vast majority of our new customer starts in Q3 and customer retention remains strong. In the US in Q3, Omnipod new customer starts coming from multiple daily injections and legacy tubed pumps was an estimated 80-20 percentage split which is in line with our historical mix. Omnipod was specifically designed for individuals on MDI and as expected, we are driving pump penetration across all age groups in both the Type 1 and Type 2 markets, while also growing our share positioning Insulet as a leader in these markets.

We estimate that we are the clear leader bringing customers into the market from MDI. In addition to growing awareness of Omnipod and high product demand among patients, a growing number of HCPs are writing scripts for it. In Q3, we saw another increase in prescribers growing to over 17,000 up from over 15,000 in Q2. In a market where there are 7,000 to 8,000 endocrinologists this shows the broad appeal and ease of prescription of Omnipod 5. Importantly, this extensive reach is critical to access patients who are not seen at the high-volume pump-prescribing clinics that historically defines the pump market. Omnipod 5's broad appeal is also evidenced by the growing number of scripts that these HCPs write for our system. Omnipod loyalty amongst Podders has been a hallmark of our brand for many years and it is great to see the growing demand and confidence amongst the prescribing HCPs. In fact an increasing number tell us that when given the choice their patients overwhelmingly choose Omnipod.

Our results in Q3 also strengthen our conviction that we'll be able to reach the millions of people with Type 2 diabetes who need insulin therapy as a part of their care. In the quarter, Omnipod adoption in the Type 2 market continued at a steady pace with Type 2 patients representing approximately 20% of our US new customer starts. These new customer starts come from across our Omnipod portfolio of products, demonstrating the clear benefits that our products offer the Type 2 population. Omnipod DASH continues to be the leading insulin pump offer with an indication for use in the Type 2 market. While we can't yet market Omnipod 5 for Type 2, the obvious underlying demand for AID in the Type 2 market is encouraging. And we look forward to bringing Omnipod 5 to these customers once we complete our pivotal trial and secure an extension to our existing indication for use.

And to that end, we are very excited to announce that we have reached our enrollment goal this week in our US Type 2 pivotal study. As a reminder, this is a study of up to 400 participants with a 13-week protocol comparing Omnipod 5 to participants' previous therapy. The feedback from HCPs and study participants continues to be very strong and strengthens our confidence that Omnipod 5 will have a big impact in the critically underserved population of Type 2 patients who require insulin. We will provide further updates as the trial progresses. I'd like to make a few comments about the ongoing debate about the impact of GLP-1s on our markets. As we've made clear, we regard the GLP-1 class of drugs as an important innovation for people with Type 2 diabetes and they have been indicated for use in Type 2 diabetes for several years.

These drugs help many of the same patients we aim to help and we applaud their innovation. Further as a reminder, we believe GLP-1s do not materially impact our end markets. They are not indicated for use in Type 1 diabetes which is an autoimmune disorder and there is no apparent mechanism for them to impact the course of type one as a condition. Likewise, there is no apparent mechanism for GLP-1 drugs to alter the underlying progression of beta cell decline that is characteristic of Type 2 diabetes. Last month we published a short slide presentation going into these issues in more detail. This week we published an update to those slides based upon data that was recently presented at EASD. In a large retrospective study of 23,000 users of semaglutide, the evidence presented suggests three important conclusions.

First, semaglutide has almost identical impact on glycemic control as liraglutide in terms of the magnitude and duration of A1c reduction. Second, this real-world evidence shows a very clear relationship between dose adherence and glycemic control such that only the most adherent users receive the level of benefit that has been demonstrated in more controlled clinical settings. Finally and importantly, weight loss and the persistence of weight loss for semaglutide users in this study was demonstrated to be independent of glycemic control. In short, real-world evidence shows that patients using semaglutide continue to have their diabetes progress with limited or no incremental duration of effect over previous drugs and type 2 diabetes continues to progress even with weight loss.

For those who are interested in more detail, we refer you to our updated presentation which is available on the Insulet Investor page. These data reinforce our existing view. Because the underlying disease continues to progress most people with type 2 diabetes will eventually need to incorporate insulin into their therapy. Insulet is incredibly well-positioned to serve these customers as they progress in their condition and need to add first basal and then intensive insulin into their treatment. We are already winning in this market and we continue to have strong conviction that people with type 2 diabetes represent a large and underserved population. We are continuing our efforts to bring the full power of a broad portfolio of insulin delivery options including Omnipod DASH, Omnipod 5, and Omnipod GO, which I will come back to in a few moments.

In addition to our type 2 pivotal trial, we are progressing several additional clinical initiatives. We are pleased to have completed the protocol with the last participant in our randomized controlled trial using Omnipod 5 with Dexcom's G6. We're in the process of analyzing and preparing the data, which we expect to show the clear benefits of Omnipod 5 therapy over non-AID systems. We are also making great progress with the RADIANT study which is our Libre 2 Integration trial, for which we began enrollment in September. Clinicians have remarked about the simplicity and ease of transition for MDI users to Omnipod 5 in the outpatient setting including in regions where it is often the norm for AID therapy to occur in the hospital for days due to the complexity of existing tubed pump offerings.

We are excited that our integration with Abbott's Libre 2 sensor has advanced to the point where study participants are using the system. Both of these studies will provide the evidence we need to drive pricing and market access initiatives as we launch Omnipod 5 across our international markets. I'd now like to turn to three key areas of innovation for us; expanding the Omnipod 5 platform, moving upstream in the type 2 market with Omnipod GO, and driving the future of AID with our advanced algorithm program. The widespread success of Omnipod 5 makes it easy to forget that the current version of our offering is in some ways our minimum viable product. In order to achieve the full promise of the platform, our aim is to expand on customer choice, both for phone control and for CGM use.

In that context, we are excited to have received FDA clearance for our 510(k) for the Omnipod iOS app. This is another major innovation milestone for Insulet and iOS is one of the most requested features from our customers. We are thrilled to have the opportunity to provide the iOS option to our existing Omnipod 5 customer base as well as future customers. Because the iOS app represents a completely new software platform we expect to begin a US limited market release in early 2024. And upon successful completion, we will make iOS for Omnipod 5 broadly available as soon as possible. With regard to CGM, our efforts to expand our sensor integrations with our partners, Dexcom and Abbott, continue to steadily progress. I've already mentioned our progress with Libre sensor integration in the context of our European trial.

We are also hard at work to complete our integration with Dexcom's G7 sensor and we are excited to announce that we are planning for a limited market release of Omnipod 5 plus G7 also in early 2024. Omnipod 5 is the market-leading offer and with these coming innovations, we are confident we will be able to maintain and extend that leadership. A key innovation effort that moves us upstream from AID is Omnipod GO, which is designed to radically simplify the initiation of basal insulin therapy for people who need to start insulin as their type 2 diabetes progresses. Even small penetration into this market will meaningfully contribute to our long-term growth trajectory. We have commenced the commercial pilot for Omnipod GO in the US, which includes HCPs that we don't typically call on who are new to Omnipod most of whom who are primary care physicians.

Our commercial pilot is providing us with the opportunity to present Omnipod GO and also to educate PCPs on all of our Omnipod offerings. Although early in our pilot, PCPs are telling us that Pod therapy is much easier than pump therapy. As a result these HCPs want to learn about the entire Omnipod portfolio. We expect both Omnipod GO and Omnipod DASH to make the treatment pathway far easier for these type 2 patients. Learnings from our ongoing Omnipod GO commercial, pilot will help us to refine our plans for commercialization in 2024. We are continuing to progress work on our next-generation AID algorithm with our Evolution feasibility trial which we began earlier in the year and which is being conducted in New Zealand. The goal of this feasibility study is to test potential enhancements to the Omnipod 5 algorithm in order to further drive simplicity of use.

We've been able to launch this study very early in the life cycle of our AID offerings, specifically because of the unique aspects of Omnipod 5, both because the on-market algorithm is highly effective and because of our ability to gather actual usage data from essentially the entire population of Omnipod 5 users. We expect that cloud connectivity for -- of Omnipod 5 coupled with our data sciences capabilities will allow us to materially accelerate our algorithm development efforts over time. Finally, an important update on our intellectual property portfolio, which is a key asset enabling our continued growth. In August, we filed a suit in the US against EOFlow and other affiliated parties to stop the misappropriation of Insulet's proprietary trade secrets.

Last month, after requesting preliminary relief and obtaining some initial evidence, the court granted our request for a preliminary injunction against EOFlow, which prohibits EOFlow from manufacturing marketing or selling to any new customer any product that we designed developed or manufactured using or relying on Insulet's trade secrets. The court also extended the prior injunction issue to restrain EOFlow from disclosing to any third party information that contains derives from or incorporates Insulet's confidential information. In granting Insulet's motion the court found "very substantial indeed strong evidence of misappropriation" and "that Insulet is likely to succeed on the merits of its trade secrets claim." We have invested considerable resources over many years developing our Omnipod products and we are confident we have a clear lead technically and in terms of scalability.

We will continue to vigorously defend our IP to protect those investments. In closing, we completed another outstanding quarter and we have sustained momentum across our business. We are enjoying continued rapid growth in the US type 1 market and we're seeing accelerating adoption in our international markets where Omnipod 5 is launched. We are also seeing continued growth in the type 2 market across our Omnipod offerings. We are excited about the catalysts coming in 2024 with iOS functionality CGM-integrated Omnipod GO that unlock a lot of market growth for many years to come. I want to thank our entire Insulet global team for their engagement and hard work as we continue to drive our mission to simplify life for the millions of people with diabetes around the world.

Before I turn the call over to Lauren, I want to welcome and congratulate her on her role as our Interim CFO and Treasurer. Lauren is our Chief Accounting Officer and has been with Insulet for close to five years. She has long been a key member of our finance team and has contributed significant value to the company and to shareholders during her tenure with us. We are thrilled to have Lauren in this role to support our continued execution of our strategic priorities. With that, I will turn the call over to Lauren.

Lauren Budden: Thanks so much, Jim. It's an honor to serve as interim CFO. As Jim shared, Insulin achieved another quarter of robust growth financial performance and strategic progress. We once again delivered strong global new customer starts fueled by huge demand for Omnipod 5 in the US. And we are seeing a very nice uptick in new customer starts in the international markets where we launched Omnipod 5. As a result of our growing customer base, we delivered 25% revenue growth in Q3, finishing above the high end of our guidance range. Our outperformance was driven by global Omnipod growth of over 27%. On a reported basis, for total revenue, foreign currency was a 180 basis point tailwind compared to Q3 last year. US Omnipod revenue growth was 35% and exceeded our guidance range.

Revenue growth continues to be driven by our annuity-based model and growing US pharmacy volume. This includes an increase in volume contribution from Omnipod 5 and Omnipod DASH and the related premium for Pods in the US pharmacy. Pharmacy channel access continues to be a competitive advantage and we remain focused on driving increased volume through this channel, which in Q3 represented between 90% and 95% of our total US volume. Omnipod 5 ramp dynamics resulted in an estimated net tailwind of approximately $10 million, which is in line with what we expected for Q3 guidance. As a reminder, since our launch, we have realized a recurring net volume benefit from new customers as well as from Omnipod customers converting to Omnipod 5, many of whom received their starter kits and first refill orders in the quarter plus some initial stocking in retail pharmacies.

Our estimates have been net of those Omnipod 5 customers who skipped an order in the period. In Q3, as we expected, the volume benefit from conversions has been normalizing and was therefore immaterial as the majority of our existing customers already switched to Omnipod 5. Going forward, we expect continued benefit from the two script dynamics, as we drive Omnipod 5 new customer starts. In Q3, US attrition and global utilization remained stable. International Omnipod revenue increased 8%, which was above our expectations. Growth was primarily driven by continued strong adoption of Omnipod DASH and to a smaller degree incremental benefit from our Omnipod 5 launch in the UK, which drove a notable increase in new customer starts. These benefits were partially offset by slightly higher attrition as we continue to be impacted by AID competition including lower distributor orders.

On a reported basis, foreign currency was a 720 basis point tailwind over the prior year. Drug Delivery revenue declined 27%, which was slightly below our guidance range, due to a lower forecast from our partners. Gross margin was 67.8%, up over 1,200 basis points and included income of $1.9 million due to lower estimated costs associated with the medical device corrections we announced last year when we took a charge of approximately $37 million in Q3 last year. Excluding both, gross margin increased 120 basis points to 67.3% in Q3 of this year. This exceeded our expectations due to favorable manufacturing costs and higher-than-expected revenue. The year-over-year increase in adjusted gross margin was primarily driven by improved manufacturing efficiency and a premium from volume growth in the pharmacy channel.

These increases were partially offset by expected higher production costs as US manufacturing continues to ramp and become a larger portion of our total production. Operating expenses were up year-over-year in line with our expectations as we invested in our business to support our strong growth trajectory. Adjusted operating margin was 12.2% and adjusted EBITDA was 19.1%. Both exclude the favorable medical device correction adjustment of $1.9 million and were above our expectations due to higher-than-anticipated revenue and gross margin. Turning to cash and liquidity. We ended the quarter with $685 million in cash and the full $300 million available under our credit facility. This strong financial position gives us the flexibility to invest in our innovation pipeline and other key areas of our organization in order to build on our foundation for long-term sustainable growth.

Now turning to our 2023 outlook. For the full year, we are raising our expectations for total Omnipod revenue growth to a range of 29% to 30% and total company revenue growth to a range of 26% to 27%. For US Omnipod, we are increasing our revenue growth outlook to a range of 37% to 38%. This increase is primarily driven by continued strong Omnipod 5 adoption stemming from consecutive strong new customer starts and to a lesser extent ongoing conversions from other Omnipod products as well as from recurring revenue from Omnipod DASH and the benefits of our pay-as-you-go model in the pharmacy channel. As a reminder, Q4 of last year was the first full quarter of Omnipod 5 sales contributing to a tougher comparison in the fourth quarter of this year.

The prior year included the two-script benefit, which was in large part due to the accelerated pace of customer conversions in the second half of 2022. It also included retail channel stocking. For International Omnipod, we are raising the low end of our guidance range and now expect 9% to 10% growth. On a reported basis we estimate a favorable foreign currency impact of approximately 100 basis points. We expect growth will be driven by ongoing Omnipod DASH adoption as well as the benefit from our Omnipod 5 launches in the UK and Germany partially offset by AID competitive headwinds. As a reminder, given the nature of our annuity model we expect Omnipod 5 to more meaningfully contribute to our growth rate in the second half of 2024. For Drug Delivery, we are reaffirming our guidance range of a 45% to 50% decline.

Turning to 2023 gross margin. We are raising our adjusted gross margin expectations to a range of 66% to 67% and expect to achieve the midpoint of this range. The increase from our prior guide is driven by improved manufacturing costs as well as higher-than-expected revenue including favorable mix. Although certain headwinds that we experienced during 2023 will carry over into next year, we expect to see further gross margin improvement in 2024. We now expect adjusted operating margin in the range of 9% to 10% given our revenue and gross margin outperformance. We remain committed to margin expansion and anticipate leveraging our investments in 2024 and beyond. Turning to our fourth quarter 2023 revenue guidance. We expect total Omnipod and total company growth of 22% to 25%.

For US Omnipod, we expect growth of 28% to 31%. Even with the challenging comp due to the Omnipod 5 full market release in August of last year our new customers start momentum and the benefits of our annuity model continue to fuel our revenue growth, including strong expected sequential dollar growth in Q4. For International Omnipod, we expect growth of 5% to 8%. On a reported basis, we estimate a favorable foreign exchange impact of approximately 300 basis points. Finally, we expect Q4 Drug Delivery revenue to be approximately $3 million to $5 million due to timing of production and orders. We have sustained momentum across our business and we are poised for another strong year in 2024. While we will provide formal 2024 guidance on our Q4 call in February, I will provide some color now on how we are thinking about 2024 given the strong momentum we see in the business.

We anticipate another year of large dollar growth in 2024, even with the significant volume benefits realized in 2023 from our Omnipod 5 ramp. For US Omnipod, we expect a growth rate within the mid-20% range, fueled by Omnipod 5 and its strong pace of new customer starts as well as our annuity model and pharmacy channel access. For International, we expect continued growth with Omnipod DASH and more meaningful growth towards the second half of the year from our recent Omnipod 5 launches in the UK and Germany. We expect continued headwinds in the countries where we do not yet have Omnipod 5 to partially offset this growth. All in, that puts us somewhere in the high single digits for the year with the second half of the year accelerating to a range of high single digits to low double-digits.

For Drug Delivery, we expect to see a decline and at the high end of the forecast, we expect the decline to be lower than in 2023. In conclusion, we delivered another quarter of solid financial performance and we further positioned Insulet for continued momentum through the end of this year and beyond. As we continue to capitalize on the global market opportunity and invest in innovation, we're poised for another strong year of customer base growth and revenue growth. Opportunities of this magnitude are few and far between, and we are very well positioned to drive long-term value creation for our shareholders. With that, operator, please open the call for questions.

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