Insulet Corporation (NASDAQ:PODD)
32nd JPMorgan Healthcare Conference Call
January 15, 2014 5:00 PM ET
Duane M. DeSisto – President and Chief Executive Officer
Kim W. Gailun – JPMorgan Securities LLC
Kim W. Gailun – JPMorgan Securities LLC
Good afternoon. I’m Kim Gailun with the JPMorgan Med-Tech Team, presenting next, we’re happy to have Insulet and from the company we have the CEO Duane DeSisto.
Duane M. DeSisto
Thank you, Kim. So obviously the first slide the Safe Harbor one, we’ll move on. When you want to understand about Insulet Corporation, if you were a Type 1 diabetes patient and you are on multiple daily injections and decide to go to a pump, the first decision that you make as a pumper is do you want to pump with tubing or do you want to pump that’s tubeless.
And where we fit into this matrix, there is probably about four companies today out there that have tubing in various configurations and we are the only tubeless insulin pump in the world today for Type 1 diabetes patients. And we’ll go through a little bit why that’s so important to diabetes patients, we’ll talk to you a little bit about what we believe the barriers to entry for someone that follow us in this space and I’ll kind of walk you through it.
For those of you who have not attended this conference for the last three years, we are talking about launching our next generation product here, so we did this in 2013, we’ll give you a little bit of those results. So as I said, as a diabetes patient first thing you are faced with is tubes or tubeless. Why would you go with a tubeless pump? It’s pretty simple, right if you look at our Pod it’s discreet, no one has to know that you have diabetes in terms of your clothing, you are not cutting holes in your pocket, a woman does not have to wear garter belts or strap to pump to her brazier if she wants to wear a dress.
So from a life style standpoint it’s pretty simple, this is it. the fastest growing segment which will show you of our population is kids, if you think about a kid that’s highly active, right they want to go out, they want to play, they want to be tripping over some tubing, catching on the door handle, they don’t want to be going to school with all the friends looking at this thing hanging out.
It is a discreet, easy to use device which we will prove over the next couple of years here we believe is driving improved outcomes, if you think about this product, unlike a traditional insulin pump, because we have automated insertion this production can go anywhere on your body, so you can put it, a lot of our patients wear it, so when they take their shirt off or they are looking in the mirror, they never have to see it. As a diabetes patient the first thing you ever want is you want to cure, the second thing you want, if you can’t have a cure you want less time thinking about your diabetes, you want to control the disease not have the disease control you.
You don’t have to take my word for, we do bunches of surveys, this is just a sample of one of it, 90% of patients prefer this, because of the automatic insertion over their current infusion set, the idea that you truly have continuous insulin delivery, we believe there is a clinical aspect to that and over time we will improve that but if you kind of take a look at this particular product, it is truly continuous, you don’t have to take it off to go to shower, it’s waterproof and it basically does not impact your life style in a meaningful way.
The other thing that we do, do is in traditional insulin pumps you have the ability to just keep wearing this, there is no automatic shutoff, we also believe over time it will be proven that people that wear their pumps beyond the 72 hours and 80 hours, what you will see is degradation [indiscernible]. If you know of someone who is on the traditional insulin pump they typically have to wear that set on their abdomen, if you see him without their shirt, it will look kind of pop marked and scar typically, but you have to use that set over and over again, the automatic insertion like I said allows us to go everywhere, it allows for better absorption we believe and we show that in some clinical work we done.
Once again, this is just a small retrospective study, you can see the numbers in this particular retrospective study, we believe that we are going to continue to prove that a product that is truly continuously delivering insulin that easily use which adheres – which forces compliances, result in better clinical outcomes.
A few months ago, I think it was back in October or November, we announced that we hired our first in-house Medical Director, the doctor’s name was Dr. Howard Zisser, Doctor Zisser if that name rings a bell with you, any people that follow this space, Dr. Zisser has been out of Samsung Diabetes, he is the one that’s been looking at all these continuous close loops, any kind of research CGM, anything we have done on the West Coast, Samsung has kind of in a center of excellence that people go to and work with.
We brought Dr. Zisser in for two full purpose as we continue to evolve and we’ll talk a little bit about our CGM program and where we are going, as we evolve into that obviously he has incredible insight as we evolve into our next generation handheld, he has a very good patient perspective on what he believes is important and not as well as our input. And last but certainly not least, if you look at the healthcare industry in general right the cost of healthcare is no big surprise, it just keeps going up, you look at ObamaCare, you look at all these things that’s always in the newspaper, eventually it’s my belief its not happening tomorrow, but its my belief that overtime the way companies are going to survive in this any space in healthcare, again have to drive outcomes.
With Dr. Zisser’s help we believe and he has been with the company early on as we used to use him as outside research, so he has a very good understanding what this product is all about and so what we believe is starting this year and we will continue on and we are going to be able to put together a basically a story of efficaciousness, if that is a word that will show that we can drive, we can drive better clinical outcomes obviously [indiscernible] and we believe we have an advantage over traditional insulin pump.
What to mean our product is pretty simple, we are growing the market, if you look at the market leader, they have kind of – they churn that big installed base, they have been out there for 20 some odd years, if you look at where our customers are coming from, 70% of the customers are new to insulin pumping, so we are in that MDI space, through that big space, we are playing in the big space and we believe as a commercial strategy we believe with the new product, we’ve overcome one of the major barriers and once again you will see it in the numbers on this slide and further slide here that the size the 33% reduction in size has brought out significant more interest in product.
It is now of a size where the pediatric portion of our business, if you think about teenager, type of clothing that’s worn today its tight fitting, so everything shows up, this reduction in size what we found it in the back half of this year, we roll this out has really kind of spurred a lot of interest in the product, renewed interest in the product and has brought back a lot of doctors that had told us early on especially these doctors that only deal with the pediatric population, they said listen when you get that small one come back and see us and then we can talk and we are in a position now with a lot of those, you will be able to see in the couple of slides, where the business is coming from.
35% of our business under 19 years, why is that important? If you think that it, I guess the best, the best kind of analogy I can give you, the old days before the iPhone you had the old cassette players that you popped in and no one goes back to that but once the iPhone here – well this is the iPhone for diabetes patients, this population that we are excited about obviously that some portion of that is such a young group of people, but that disease is out there more than half of the people diagnosed with Type 1 diabetes are coming from this population and that is the fastest growing segment of our business.
Now as a company, 2013 it was kind of crazy year for us, we converted on entire installed base to this next generation products, so kind of put in perspective we have approximately 60,000 customers that went from old product into the new product and being the ambitious people that we were we try to do it in about four months, I would love tell you it went really smoothly but there were a few bumps, but work through that now.
And what I can tell you is well we all as a management team and our sales force they did a phenomenal job and we kind of weathered the storm in terms of people wanting the product now. We really came through the year in a very, very good fashion; I mean we are really excited about how we finished up year. If you look at is, we have about 15% of the U.S. insulin market which comes back to about 4% of the Type 1 market. So while we believe we’re the fastest growing pump company in terms of new stars, we believe that we’re getting a significant portion of the newly diagnose patients, while we believe that we have the right segment in the market in this younger generation that attributes to this product are really, really what that group of people wants, we barely scratch the surface.
On the international front what we said in previous meeting’s here, for those of you don’t follow the company, we did business with the company called Ypsomed and basically Ypsomed is a distributor for us, we sell that product to them at reduced rate and then they sell in the market pure business, this is not unique to the United States, their business has grown over 100% in 2013. The other thing that’s really kind of nice is obviously the main guy in this space is Medtronic Minimed and these guys compete head-to-head with the 530G, they have been doing it for a long period of time, we’ve now to seen it introduced in this market and its back to the same thing, what people want simple, easy to use, discreet product and they are having a significant amount of success.
So it is like I said, around the world we’re pretty happy with the progress we’re having, if you look at it, also the other piece of this as I highlighted 20% of our shipments are the OmniPod for prescribing doctors, so we started selling the product 2006, put in perspective here we have about 120 field people, its pretty much divided almost evenly between sales people and nurse educators to basically service these doctors offices. We’re excited about the fact that we’ve picked that new prescribing doctors. Those people like I said, pediatric physicians initially were a little reluctant and if I showed you the two Pods side-by-side, you know you would tell me, when you see it on a 4-year old it’s a big difference, it’s a major difference.
And so, we’re very excited about this group of people, 100% growth in under 10 and as we said 60% growth in kids 18 and under, it is the fastest growing segment. The other thing that we’re excited about once again the size factor by diabetes less is always more in the size factor with female populations also jump up, I mean these are all metrics that we’re tracking we’re like I said we’re incredibly excited about this pediatrics population and the speed of the side business is growing.
Our plan for 2014 is I’ll show you in the next slide here, but the manufacturing is in very good shape, so we can now for the first time in a while we are going to expand the sales force, we are going to add about 20 bodies to the sales force here, this week it’s ironic we changed our National Sales meeting from last week to this week because JPMorgan was always last week in the JPMorgan changed up, I was down there this weekend and we just had the awards banquet 2013, we have a very fired up sales force, it was about a 50% increase in commissions and pay to our sales force for 2013.
So I have a very, very fired up group of people, we are pretty excited about it, we are all glad that like I said that that whole transition is that’s in the rear view mirror. So this year it’s all about executing, we have to execute and we want to continue to drive the margins, like I said the volume in the manufacturing lines are in place, we are going to expand the sales force and we are going to continue to grow this way.
One of the biggest competitive advantages as I have pointed out to you, when you make that decision tube versus no tubing, there is only one no tubing company and I can go down here and talk to you about this IP portfolio, 24 hours, seven day a week, customer support that you need, the fact that we have a pay as you go model, I mean there is a lot of interesting things.
If you want to see the blocking issue, what makes this a very, very expensive business to get in, is the top part here, it’s pretty simple, we are basically making $400,000 Pods a month, if you look at if we get we have 60,000 patients, if we get about 400,000 patients on a world wide basis which is not ridiculous when you think there is about 3 million Type 1 diabetes patients, so about 15% of the worldwide market we are going to have to make a million Pods, we are going to be making a million Pods a week.
So that would give you some indication of what the blocking issue for any company getting in this space, right if you we are going to make a disposable insulin pump, the manufacturing this piece is the single biggest barrier to anyone trying to do this, we’ve had a relationship with Flextronics for multiple years now, Charley Liamos have put me in touch with it, Charley has been those guys, I think 17, 18 years he is in the building here today and if you look at it, it takes a long time to get this right, we’re excited about it, we feel we have a clear path with 65% plus gross margin in the U.S. based business, so we are really, really excited about that like I said we are going to 1 million Pods a month is where we want to be.
The other thing that we are excited about is from day one we believe this had the potential to be a platform technology, so when you look at the space it’s right, I mean the space that if when people talk about diabetes and they talk about the really staggering numbers it’s in the Type 2 space right and Type 2 diabetes could be anything from little exercise, maybe taking an oral medication to you are about to end up on insulin kind of is the range.
So we will be looking that space and you can spend a lot of money in the Type 2 space kind of chasing your tail, so the thing that was fascinating to us about three years ago what we basically did is we conducted a study with Eli Lilly’s U-500 insulin kind of put in perspective, Type 1 diabetes patient expects fast acting U-100 insulin, the counterintuitive thing is if you have Type 2 diabetes and you need insulin, you need more insulin than you do to correct your diabetes than you need with Type 1. Obviously your body fights the effects of the insulin of Type 2; Type 1 your body is just not producing it.
So as a result of this, if you look at it there is probably somewhere in the neighborhood of 1 million to a 1.5 million people that I would describe as large body mass index people, have tried just about everything in this Type 2 space and have failed and these people we believe are the perfect candidate for U-500, so it’s five times the strength of U-100, putting in perspective for you.
If you look at that – if you look at that business now before we kind of stuck our toe in the water about three years ago we did a year long study with 10 patients with a physician named Dr. Wendy Lane in Ashville, North Carolina, we dramatically improved those patients A1Cs, we dramatically improved their glycemic variability.
She published a paper on it, we went hand-in-hand with Dr. Lane to Eli Lilly to describe what we meant and how we felt we ought to go about putting the two products together, they immediately hired her. So it was kind of fascinating how quickly that happened, but where we are today is we signed an agreement with the Eli Lilly, we are in the process of converting the hand-held to U-500, so you just think about it, even multiply or divide everything by five.
Our goal is to have that submission in by the end of the year and then we will start clinical work with the drug in hand-held together next year with Lilly. So we want to go into the market with a drug labeled specifically for use with the OmniPod and we really want to target that segment of the population. The good news about that segment of the population, the call point for the sales force is same place, when you get to the point where you need U-500 you are no longer with your GP, you are with an endocrinologists, or in a practice such as the Joslin Diabetes Center. So it’s the same call point, it’s a real interesting opportunity for it and best of all we already know that we can drive a better outcome than traditional ones.
With regards to CGM, I think the thing we talked about last year; we believe that the right final configuration of a product is to basically have the CGM sensor integrated into the Pod, one thing on the body. In the early days we did lots of studies, we put two thing – one thing on the body, 90% of the Type 1 diabetes patients are willing to live with, two things on the body, it drops down to about 40%. It’s pretty simple. Back to the same thing that is diabetes patient what you want? You want a normal life, the more stuff you have to stick on your body the less normal your life becomes, it’s that simple.
So we believe the right configuration is to put basically one sensor, one thing on your body integrated sensor into our CGM, we are working with the privately held company, we kind of told everybody last year that we’re doing that. Where we are at the single biggest thing our product is ETO sterilized that current sensor technology as it exists today is not a big fan of heat or temperature, I mean temperature or humidity.
And so that was the first big hurdle, where I can tell you where we are today, we feel very comfortable that we now have a profile it’s a ETO sterilized sensor and 2014 we are going to start kind of toying around with what the configuration is, what it should look like as we put it in the product, we will start doing that on the animals and then hopefully by the end of the year we will start kind of taking a hard look but if it goes well we will start doing it with people. So we’re excited about where we are in that process, but it was the single biggest barrier that we had to leave through and like I said it took us about a year but we are pretty happy, we think we now have a protocol that will get us there.
And last but certainly not least in terms of platform technology, if you look at there is other drugs that can be delivered through here, I will tell you since we announced the Amgen agreement we now have a list of companies that are willing to talk to us to the point where in our plan for 2014 we are going to actually put a business development person and start helping us with it. Our business development prior to that was if the phone rang we picked it up and said “listen as long as we don’t have to change our manufacturing process, we could be your partner” they said we had to change and we just moved on.
So we learned a lot through this process, I would tell you we have kind of two configurations, the Amgen product is basically a Pod that needs hand-held and then in the case of Ferring pharmaceutical one which is basically a fertility hormone in which they practice, they have done this in Europe, they now come into Canada and the United States, we filed both, both countries were helping them. That has an icon driven hand-held with a traditional Pod, all of which we can put through our manufacturing process.
What’s the benefit of that, where for these companies if you are going to start doing this with these various drugs there is no disease as big as diabetes period. end of conversation, what we are able to do by putting it through our manufacturing process, we are able to leverage all that overhead and be able to provide these at prices that we can make money and the drug companies can absorb in terms of their [indiscernible] device.
So we have a list of drugs that we’re starting to take a look at, I would tell you they kind of fall into a couple of categories, some of the bigger pharmaceutical companies, they basically have drugs that are about to come off patent and become generic. So if we can extend that, we can extend that pricing by improving their efficacy by basically taking the humid factor out of the particular drug, they are very intrigued by that, I think the other ones that we are working with, there is a bunch of other companies in which there is some side effects to the drug, so in one case we are taking approved drugs that are kind of come into the end of your life and trying to extend the life of the pharmaceutical companies.
In the other case we are taking drugs that have not yet been approved in this kind of a basically a device and drug submission in which as one example, we are working with the company that has an obesity drug and the side effects from this injection what they found early on were pretty dramatic and so as a result by using our product and we can dramatically extend the delivery rate of that we are able to tweak down the side effects.
So we are in a couple of different camps, all of which what I am excited about, all of which you can see have a financial benefit, a clinical benefit to all these companies, so it’s not – we are just saying let’s just try it, there has to be a business model and it makes a significant amount of sense for us.
In terms of the guidance we gave for 2013 while we are not going to release our earnings today, because Ernst & Young starts next week, I would tell you we gave guidance at 244 to 250, we are well within that, we feel good about the range that we gave there and we’ll go from there, I think the other couple of things we basically for last two quarters second quarter, third quarter the business has thrown off operating cash, we’re taking – we’re looking at this, we’re going to start driving towards operating profitability and we’ll roll up the fourth quarter here, we did make the payment in the settlement with Medtronics of $5 million which maybe the only thing that keeps us from putting three quarters in a row together on that.
I think when we take a look at next year, although we are not giving guidance and we’ll do that when we do our earnings release, I personally would be disappointed if the number doesn’t start with a three, I mean that’s kind of how we are looking at the world, we are excited about it, we are talking about hiring 20 sales people and this is kind of how we are going to build that to model.
When you take a look at the business, it’s pretty simple, to kind of recap this the great part about this business is the first year when I think I will never say it’s easy, because it is a lot of work, but I think we have some – finally have some predictability in this business after, Mike and I were laughing out there we went public, we went public in those seven and we had these great visions and there has only been a couple of – its been kind of more like this than the perfect straight line that everybody drive towards, but we are now in a position where we’re looking at a core business growing by about 30%.
Those numbers that I showed you kind of just refresh everyone’s memory, we have this little business called Neighborhood Diabetes, we basically pick that up to supplement our back office, they were a recipient of or a lack of recipient of competitive bid, so those numbers from 2012 were down about $8 million, we lost in the competitive bid process as a result of all that but we are still growing the business. So we look at our base business, we are very, very excited, we are looking at growing that base business about 30%, new patients adds in excess of 25% and being operating profitable.
Like I said, I think the biggest thing I throw all those numbers out to you and you look at we barely scratch the surface in this space, we’ve done it with 120 people, the market leader has over 400 people, we re gaining market share, we are growing the market and we are getting the right type of customers, but if you are kid and you have been on this product, you are never go on the tube pump, you may if we don’t do a good job, you may go back to shots, but you are never going on tube pump, we have the right demographics, we have the right people, so we are very, very excited about that and last but certainly not least this is a – we have no doubt it is a platform technology for the company. Thank you.
[No Q&A session for this event]
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