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Insulet Corporation (NASDAQ:PODD)

Presentation at Morgan Stanley Global Healthcare Conference

September 11, 2013 8:30 a.m. ET

Executives

Brian Roberts - CEO

Analysts

Steve [Bucha] - Morgan Stanley

Steve [Bucha]

Thank you all for joining us here in the early hours of day three at the Morgan Stanley Global Healthcare Conference. I’m Steve [Bucha] from Morgan Stanley. It’s my pleasure to welcome all of you, and to welcome Insulet this morning. We have Brian Roberts, CFO of the company.

Before we get into the discussion, I do want to remind everyone that all the relevant disclosures to this conversation are available at MorganStanley.com. Before I get into the Q&A, I do want to open it up to Brian for any introductory comments.

Brian Roberts

Good morning everyone. Thank you for having us. Steve, certainly appreciate being here today. Insulet has, I think so far here in 2013, exceeded a lot of our expectations. We launched our next-generation Omnipod back in February, and so far the results from that have been very positive, where we’ve continued to see basically 50% year over year growth in our initial shipment numbers.

Coupled with that, we’ve spoken a lot around our manufacturing capacity and the fact that over the last few months we’ve basically been in a hand-to-mouth type scenario, as we’ve ramped up the pod and started to transition our customer base.

So in June, we started the transition of our customers. I’m happy to sit here today and look out over the next few weeks and realize that we’re basically going to have the transition effectively complete and behind us by the end of September. We originally said we were on a three to six month path to get that done, and it looks like here, kind of four months in or so, that we’re going to basically be probably 95% or so of the way complete. Just folks who haven’t taken reorder in the third quarter we’ll have to convert over in Q4.

Alongside of that, one of the big questions that’s been out there for folks is around manufacturing capacity. And I’m happy to report that our third line will be operational at the beginning of September, actually a few days ahead of where we planned. Charlie Liamos, our COO, has been absolutely giddy over the last few days, where he’s been able to report out effectively new record highs each day with pod production.

Didn’t get a number for yesterday while I was down here and traveling, but we’re at a point now where we’re producing pretty consistently north of 30,000 Omnipods per day. And so the good news with that is it starts to put our inventory in a good, solid recovery mode, where we will be able to meet demand here in the third quarter and then start to build those levels in Q4, now with this capacity of basically a million Omnipods per month.

So all-in, everybody’s feeling great, and we’re making a lot of progress, and I’m happy to answer your questions.

Question-and-Answer Session

Steve [Bucha]

With the new launch, now with inventory and supply coming back on, it does beg the question, can you help us understand some of the underlying trends that might help us get a view on how the company can grow going forward? Could you give us a snapshot of what you’re seeing on the ground, and some of the accounts where they have the new pod, where they have supply, what are you seeing in terms of utilization, maybe the systems prescribed per subscriber? What are you seeing in terms of those organic underlying trends?

Brian Roberts

That’s a great question. I think one of the things that we’ve always believed internally is that the next generation pod would really be a top line mover for the company, beyond just a gross margin play into the things we’ve talked about for years. And I think so far that’s holding true.

One of the metrics that we’ve looked at over the past five or six months has been this idea of how many new prescribers are we bringing into the market. Because for us to kind of sustain the level of growth and be able to really drive it higher, you need more doctors writing prescriptions. You know, it’s pretty plain and simple.

And for us, basically through the end of June, one out of five of our new shipments to customers was by a doctor who hadn’t prescribed the product in at least the prior 18 months. So kind of through a cutoff date of, say, the beginning of ’12 or so, to kind of get a sense of who are we bringing in here to now prescribe.

And that’s been really encouraging for us, because the year prior, all of our growth was primarily driven by the existing doctors. Everybody was waiting for the new pod to come, and so a lot of the doctors who wanted to think about prescribing weren’t willing to do so until the new pod was available. Now with it available, we’re seeing all those doctors coming in.

We told a couple of stories back on the conference call, one for example, and it’s an interesting common theme, where across the country we’ve seen these what I call kind of critical gatekeepers in a lot of clinics. Healthcare professionals, typically certified diabetes educators, or registered nurses, who, whether it’s consciously, subconsciously, whatever it may be, influence the decision of their patients of what pump they ultimately move to.

And in a lot of these cases, we receive these stories from the field where they say, we were able to take this person who was a user maybe of another pump, have them try the new Omnipod, and they haven’t gone back. And as soon as they don’t go back, it really starts to open up the floodgate, where all of a sudden now they become much more willing to prescribe the new pod, and we’re seeing consistent flow of referrals and shipments coming from these centers.

That’s been one scene that we’ve seen. The second that we talked a little bit about is, not to spend a lot of time on it, but we’ve changed this methodology of how we show insulin on board within the pump. So, basically, as you’re giving yourself boluses, insulin sometimes takes time to work through. You might want to give yourself a bolus over an extended period of time.

We showed that data, if you will, in a different way than competition did. And some doctors just didn’t like it, and they found that for their staff to be confusing when they were trying to prescribe pumps and effectively have these two different methodologies of how this insulin on board was shown.

And so part of what they decided to do, some of them it was just kind of put the Omnipod on the shelf and say, until you fix this, we’re not willing to really prescribe. I don’t think we viewed it as much of a barrier, as it seems to actually have been in a lot of different clinics, especially in certain pediatric clinics, which should be our sweet spot. Until this insulin on board calculation was changed, all of a sudden they really started to, I think, embrace the pod and be able to kind of free flow the referrals and the shipments more.

So a couple of things on how it’s coming.

Steve [Bucha]

Can you give us any more data or quantification around trends in terms of market share and to what extent share gains have been a driver of your growth over the last year or so?

Brian Roberts

Certainly what we see is consistently about 70% of our new customers are new to insulin pumping. So they’re multiple daily injectors, historically. The nice part about that is the majority of our referrals do come from healthcare professionals, and the driving force behind that is a doctor looking at a patient and saying, no, you really should be on an insulin pump or considering this. And we’re in the sweet spot for that.

If you think about people who are diagnosed with Type I diabetes every year, more than half of those people are kids. When a parent can look at our product and realize that the child effectively never even needs to see the needle, because it’s embedded within the Omnipod, versus the option of taking somewhere between 15 and 20 injections every three days, it’s something that’s very powerful to a parent, to say this is something that will work for my child. We say internally a lot it allows a kid to be a kid. And we have gymnasts, and kids who are athletes and can just be outside playing ball with their friends, or swimming in a pool.

So certainly that’s one of the big trends for us, and so with that, we’ve seen, from our perspective, the overall number of people on an insulin pump in the U.S. move from maybe the low 20% kind of share range towards the high 20s. And frankly, I view that really all at the feet of Insulet driving that, because if you look at the numbers of our competitors out there who speak about their diabetes divisions, they’re down. Year over year, they’re declining. And at the same time, the Omnipod has been putting up about 30% plus year over year growth, when you correct for the level of new ships, and again we’ve gone through our little transition with the customer base.

And so that’s a pretty important thing. We look at our child segment, kind of the 18 and unders, it’s up north of 60% year over year. We look at the age zero to 10 category, it’s more than doubled year over year in new shipments. So we certainly think this is a product that’s very relevant for that marketplace, and is being embraced.

Steve [Bucha]

So it sounds like, in addition to some of the gross margin improvements that you referenced earlier, 8-10 points maybe a logical bogey, on top of that we should think about accelerating organic revenue growth next year. Impediments to that?

Brian Roberts

You never know for sure, right? And things certainly can happen. But on the whole, one of the nice things about this business is it’s a very predictable model, right? If you think about our revenue in any given period of time, on the Omnipod side, 90% of that revenue is coming from the reorder base.

And so the nice thing about as we continue to add these higher levels of new shipments every quarter, in 2013, where that really starts to pay dividends is 2014 and beyond, because now you get a full year of these folks reordering. You bring a person in in Q2, you get a reorder in Q3 and Q4. You bring a person in in Q4, that first reorder comes of Q1 of 2014, and that’s what continues to kind of compound on itself in the business.

A lot of people come up to me sometimes and they say, as a small cap, high growth medtech story, how come you guys don’t beat and raise all the time? And my honest answer to folks on that is to say if I’m beating and raising, it’s meaning one of two things. Either I’ve been sandbagging you, because this business is a very predictable model, or two, I don’t know what the heck’s going on. And neither of those to me are kind of the right approaches.

So I look at this from the golf analogy of, you know, we continue to be that nice 220 yard drive down the middle of the fairway. But it’s consistent, and it’s predictable, and to me that’s a good, solid trade about this business.

Steve [Bucha]

So, a couple of puts and takes for 2014. One of the questions that I hear from investors around the Insulet story is how does the company respond to competitive evolution next year? Medtronic has an interesting product in Europe that they’re bringing over. J&J, with Animas, has a collaboration that’s interesting as well. How do you get investors comfortable with the organic profile of the company through competitive launches?

Brian Roberts

Certainly I think there’s a couple of points on that. It’s a great question. The first is, both of those products that you’ve referenced have been in the market in Europe for a while. And I think if my friends from Ypsomed were here talking about how they’re moving forward in the marketplace in Germany and the Netherlands, I think they would tell you that they’re exceeding their expectations around their share gains.

You know, the Ypsomed folks have said recently their business is more than doubling with the Omnipod here in 2013. We’d expect that trend to continue through 2014 despite these other products being in the market.

And I think the other piece of it, when you think of it even here, certainly we’ve been up against these very formidable competitors since our inception. And with that, the first question that people really ask today - and again, I kind of go back to that gatekeeper example - so, if you get a doctor, the doctor’s primary focus is to evaluate a patient and say, are you really pump-eligible, if you will, or not. Because managing your diabetes is different on an insulin pump than a handful of shots per day.

And if you pass kind of that first pass, then you go into the nurses and others and start to look at the different options that are available to you, assuming everybody’s kind of on the table together, the first question is tubed versus not tubed. And for us, when we look at our product, and sit there and say, you know, you have an Omnipod, and you have a hand-held, and by the way, if you want the benefits of CGM therapy as well, which we’re big proponents of, over a quarter of customers use Dexcom, you put it right alongside. And you get the benefits of both of those products.

And you know, everybody says, well, the drawback of that is you’ve got two handhelds. And the reality is if you’re getting the benefits of these two products, and you don’t have to have what’s on the other side, which is an annual insertion device, 40 inches of tubing, a separate blood glucose meter, and all the rigmarole that goes with that product, what you see is people still gravitate towards our answer.

What people don’t, I think, appreciate sometimes is with our handheld, somebody says, well you have to carry these two handhelds around all the time. It’s not true. You definitely have to carry around the Dexcom receiver, to be able to get those CGM signals, and Dexcom has done a fantastic job of being able to miniaturize that device to make it much more user-friendly.

In our case, I always say, you don’t have it on you all the time, but you have it nearby. So it’s at the school nurse for most of our under sixth or seventh grade kids during the course of a day. Maybe in your desk drawer at your office. Maybe in your pocketbook or your computer bag. And you pull it out when you need to do something to change your insulin flow, give yourself a bolus, change a basal rate, or test your blood sugars. That’s it.

So the amount of interaction with our PDM isn’t as high as people think it really is. And so while the word integration kind of spurs all these thoughts and comments for folks, in reality the integration of our system or having these two separate systems working together, isn’t really different. In our case, we still believe it’s much easier to use than what folks are looking at as kind of the integrated insulin pumps.

The integrated pump, for example, when you think about the Animas product as an example, what we see in fact is people still carry around the little Dexcom nanolike receiver with them, because it’s inconvenient to be taking your insulin pump off your belt buckle all the time, to be looking at your CGM results.

Within this integrated system, you still just want to have it kind of [face] of hand to be able to pull it out very quickly. And that’s because you’re connected, you’re in tubing, you’ve got to be running it through pants pockets, all these other things, that the average person just doesn’t want to spend a lot of time doing.

Steve [Bucha]

On that note, let’s talk about CGM a little bit more, and your CGM program. I understand that there’s a relative paucity of detail available, but I wonder if you could help us understand, at a minimum, how you’re thinking about it. First of all, what were you looking for in a CGM partner, and how did you get comfortable that you had the right partner.

Brian Roberts

Great question. I think for us it was pretty simple. What makes us unique, and what makes us different is this whole tubeless, single, no assembly required, easy to use type of a system. And what I think makes us different and unique than any of these other products that are on the market today, and anything that’s frankly coming in the foreseeable future, is we have an opportunity to be able to put the sensor directly into the Omnipod itself.

And if you think about it in the terms of the patient, to be able to have one thing on the body is something that’s very meaningful for a customer. The most common place that our patients wear the Omnipod is on the back of their arm. The reason why is because when they look in the mirror in the morning, they don’t have to see it.

The person who’s living with diabetes - when you talk about a chronic condition, it’s one that interferes with so much of what you do every single day. Every time you eat, every time you exercise, every time you have a cold, anything that’s going on in your life, you need to be dealing with your diabetes. People don’t want to spend a lot of time thinking about their disease. They don’t want to be constantly reminded about their disease. That’s why people wear it on the back of their arm.

So when you go and you market to folks, and you say, what’s your view around these types of products, more than 90% of people living with Type I diabetes will wear one thing on their body. That number drops to about 40-45% when you think about wearing two things on the body all the time.

So to be able to come up with a solution that effectively has a sensor integrated into that one insertion site, we think is something that’s pretty unique for us, and could really set us apart from the competition.

When we’re looking at the technologies, one of the things that was striking about this partner for us is we ethylene oxide sterilize our pod. A lot of the sensor technologies don’t like it, right? They sterilize typically through gamma, so it’s a different way to sterilize these products, but they’re both important to have to do.

And so this specific sensor has been tested. It was mainly developed for hospital use. It wasn’t something that was going to wind up probably in the consumer marketplace competing against the Dexcom for example. It had good accuracy results, we think something that was pretty competitive in the market. And we could ETO sterilize it, and that really became a key factor for us in trying to move forward with this.

Now, that said, as we sit here today, and I know Duane has talked about it in our calls, we’re still working through a lot of that sterilization process. We haven’t achieved a level of consistency yet in the production as we test these sensors, that we’re comfortable with, and that’s something over the next, I’d say, three to six months that we’re spending a lot of time focusing on and working on, to make sure that once we can get the right cycle down, that we can repeat it time and time again with these different sensors.

Today we see some sensors work fabulously, and then a couple more don’t. And our partner is spending a lot of airtime trying to figure out exactly where maybe there’s some variability in the chemistry to make sure that we can offset that problem going forward.

Steve [Bucha]

If you fast forward two, three years down the line, what do you need to see from the combination product to get you comfortable that it’s the product that you want to launch, and that there can be some kind of relative advantage to these other products, other than a tube-free design, and what’s the right clinical endpoint to get you that validation?

Brian Roberts

I don’t think we know the answers to all of those questions yet, to be honest. But I think as we look at it today, the two major barriers that we’re trying to make sure we overcome and understand are around the sterilization process, and then we’re testing a lot around insertion.

What we’d love to be able to offer to patients is effectively what I call a one-needle approach, kind of a bi-lumen cannula approach, where you can deliver the tubing and the sensor effectively right next to each other.

We’re very fortunate that we know and we work with many of the major researchers here in the U.S. and abroad around the artificial pancreas projects, and they’ve been doing a lot of work for us in this area, to make sure that we can understand the effect of having those two devices effectively next to each other. That’s the preferred approach for us.

I think Duane sums it up very well sometimes, when we talk about what do we want this product to look like a few years from now. And it goes back to what we just talked about around simplicity and the idea of not having to be constantly thinking about your diabetes.

Our view is that ultimately you have a handheld, and you turn the handheld on in the morning, or you turn the handheld on at any point in the day, and it’s green, yellow, or red. Very simply. And if you’re green, alongside a predictive algorithm within the handheld, it gives you the confidence to know that everything the system sees over the next, let’s call it four hours, is going to be fine. If it’s yellow, you may have to take some action. If it’s red, you may have to do something immediately.

But short of that, it’s not necessarily about having to know that your blood sugar is 110, and then 112, or 86, or any of these different numbers. It’s am I good, or am I not good? Am I in the guardrails, or am I going to hit the rails? And that’s what you see a lot of people looking for.

We have a story sometimes we tell where a former board member of ours went to one of our folks who’d been around a long time, who lives with Type I diabetes, and wanted him to test a new blood glucose meter that was coming out in the market. And at the time, blood glucose meters had really moved to the idea of being 5 seconds to be able to get your results.

This meter was 8 seconds, and that 8 second meter was going to come with the promise of being easier to use, and it was going to come with the promise of being more accurate. And this person, who’s a well-respected guy within our company, and been around, like I said, a long, long time, said “I won’t try it.”

And he stopped, and he looked, and he said this right to the board member, and Duane was there, “I’m not going to do it. I’m not going to try that meter.” And he’s like, “Well, why wouldn’t you try this meter? It’s going to be more accurate. It’s going to be this, it’s going to be that.” “Because it’s three seconds more, and I test seven times per day. And why should I give 21 seconds times every day for the rest of my life, back to diabetes?”

And that’s the mindset of an awful lot of our customers. And that’s the piece that we have to keep in mind when you’re thinking about these products. It’s not that everybody wants to look every five seconds or five minutes or so at what their CGM readings and those things are. It’s all important data and people need that data, but they just want something that allows them to go about their day, and that’s really kind of how I think we envision this.

So we have a couple of relationships in place with a couple of these different AP centers around the predictive algorithms they’re working on from the software side. Certainly, hopefully, we’ll be able to couple that with the CGM technology. Again, next steps after we kind of solve the engineering challenge is to do some human trial work, likely in Europe, probably latter half of next year. And then move forward from there.

Steve [Bucha]

On the collaboration with Lilly, can you give us a sense for how you see the U-500 integration ultimately contributing to your business? And how are you thinking about the potential for a dual drug approach, something along the lines of maybe a GLP-1 coming into play?

Brian Roberts

Another great question. We’re very excited about the Lilly partnership. I’ll tell you that the Lilly partnership has been kind of four years in the making, to get them to the goal line of moving forward with this.

A doctor named Wendy Lane, who back in ’09 did the study of taking - and I might not have the numbers perfect here - approximately around 30 people or so who had highly insulin-resistant, high body mass index, Type II diabetic patients, and put them on the Omnipod. And after 90 days, for the ones that kind of followed through, was able to show that I think 23 out of 26 achieved a normal A1c.

And it’s pretty striking to be able to see that that number of people, if you will, could get to that level within that short a period of time by using this regimen. Because as we know, one of the big challenges within the Type II population is compliance. And people ultimately kind of start the regimens, and then they don’t follow through, or whatever it may be, and again, I think it goes to the simplicity of the pod that somebody could put on one and after three days or so they could be able to take it off.

Now, today, about 5% of our patients are Type IIs, so we’re working with folks today who require insulin and use the Type II pump. What we see, though, and one of the challenges for our product, is that we have a limited size reservoir. And so going to U-500 insulin, which is five times the concentration of U-100 insulin, allows you to significantly reduce the number of units of insulin a person would need to take per day.

So it takes our effectively one to two day wear pod for a lot of Type II folks and can make it a three or even a four day wear Type II pod for those folks going forward. It just opens up the market to a much broader group of people.

And the ADA, back in March, talked about 20 million people living in the U.S. with Type II diabetes. Basically, based off their numbers, and as you kind of forecast out people being diagnosed earlier, insulin treatment is becoming more in vogue a little bit earlier. And I hope none of it comes to be, but the GLP-1s and the others have had these different risks and concerns with the FDA around pancreatitis and this other stuff. Insulin, we all know, works.

And so what we’re hopeful for is that this becomes a new alternative for an awful lot of people, living with Type II diabetes, who are either on the path to needing insulin or maybe are already at the point of insulin.

The other thing that I think you see coming out of the ADA back in Chicago was other pharma companies talking about various forms of concentrated insulins. Sanofi, for example, talked a lot about a U-300 insulin that they have in development. And as you think about going forward, I think if the Omnipod can show it can work effectively for these different types of groups, the U-100 or U-500, it becomes easily adaptable to any of these different types of insulins that may be moving into the marketplace.

And you know, it’s a changing landscape, because as we see with all the rapid acting insulins, over the next three years or so they all come off patent. So for the drug guys, it’s something they’re spending a lot of time on, and thinking about, and we want to just make sure that we’re well-positioned for that group.

By doing a clinical with Lilly, it does allow us to hopefully make it simpler for doctors to both prescribe U-500 insulin as well as probably for the managed care payers to reimburse for it, which today is one of the tougher hurdles for a Type II patient.

Steve [Bucha]

Why not build maybe a bigger commercial relationship with a partner like Lilly?

Brian Roberts

We certainly don’t rule it out. I mean, they have other relationships in place with companies in the space, with various terms to run on some contracts, that we’re certainly aware of. But I think we’re hopeful that this has an opportunity to move forward and become a good partnership together. So we both are calling on the same endpoints in a lot of cases, and I think we’re pretty hopeful about what this product can bring to the market a few years from now.

Steve [Bucha]

Is there a path to getting Omnipod to a bigger chunk of Type IIs that could be on the order of 10%? And is U-500 or this collaboration more broadly an important part of that process or path?

Brian Roberts

I absolutely think it’s a first step on the path. Because again, what you see is the managed care side has not been as receptive to putting people on insulin pumps. And again, it’s cost. And they want to see that you’ve exhausted all of these other approaches first before you wind up there.

But when you’re in a period of time where people are being diagnosed with Type II diabetes in their teens or twenties, or their thirties, it’s a different course of treatment that’s required than when, a generation ago, people were being diagnosed in their sixties, and they were bridging them to their eighties. Instead of trying to bridge somebody 20 years, now you’re trying to bridge somebody 60 years, more.

The courses of treatment are going to need to be, in some cases, more aggressive, and what you know when you look at the Type I population is insulin works. But you need to be able to manage it. And the way to manage it has got to be through simpler systems that allow you to do so.

Steve [Bucha]

Brian, thanks so much. Thank all of you for joining us.

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