Insulet: Omnipod 5 Driving Revenue – But Expenses Elevated

Insulet (NASDAQ:PODD), a company that develops, manufactures, and sells insulin delivery systems for people with insulin-dependent diabetes, has a big winner with its Omnipod 5 automated insulin delivery system, which is exceeding revenue estimates, but also increasing company expenses at the same time.

Omnipod DASH, which primarily treats type 2 diabetes also contribute to growth, although it looks like it was partially cannibalized by Omnipod 5. The company is working on making further advances in this market, with the purpose of taking more market share.

While the company believes U.S. manufacturing will remain a headwind in reference to gross margin in the near term, over time it expects it to be a positive contributor to gross margin. It could take as long as two years before higher costs are mitigated.

Last, drug delivery revenue dropped another 4 percent, and the company now expects it to fall by about 35 percent, slightly above the previously guided decline of 37 percent. A major reason for the underperformance is 2021 comps from the pandemic. This unit should continue to operate at lower levels than 2021.

In this article we’ll look at some of the company’s recent numbers, why Omnipod 5 is so compelling, and the reason behind margin challenges going forward.

Some of the numbers

Total revenue in the third quarter of 2022 was $340.8 million, compared to $275.6 million in the third quarter of 2021. Total revenue for the first nine months of 2022 was $935.6 million, compared to $791.1 million in revenue for the first nine months of 2021.

Cost of revenue in the third quarter of 2022 was $152.5 million, compared to $86.9 million in the third quarter of 2021. Cost of revenue in the first nine months of 2022 was $347.3 million, compared to $252.2 million in the first nine months of 2021. Of the increase in the cost of revenue, $37 million of that was a charge associated with replacing units, shipping and reclaim costs of the PDMs for Omnipod Dash users.

Much of the other expenses were from an increase in SG&A costs from marketing Omnipod 5 and higher manufacturing costs related to Drug Delivery.

Not including the medical device correction, adjusted operating margin in the third quarter of 2022 was 11.6 percent, and adjusted EBITDA was $62.8 million, or 18.4 percent of revenue. Both of those were lower due to pressures on gross margin and the increase in operating expenses.

Gross margin in the reporting period was 55.3 percent, down 1,320 basis points. Adjusted gross margin was 66.1 percent.

As mentioned earlier, U.S. manufacturing will remain a margin headwind for approximately the next couple of years, according to management. This headwind comes partially from the company securing components in order to mitigate supply chain constraints that could interfere with the company’s growth momentum, especially with Omnipod 5, thus increasing costs.

At the end of the third quarter of 2022 the company had $720 million in cash and cash equivalents, and long-term debt of $1.38 billion.

Omnipod 5

With Omnipod 5 having a significant impact on revenue and expenses, it’s important to understand exactly what it is and why it’s being adopted so quickly across the entire market.

Omnipod 5 is a tubeless AID system that includes an adaptive algorithm which learns from the way each individual patient uses it, and consequently, after the initial two or three pods is able to customize or personalize the treatment for each user.

Feedback so far points to “increased time and range, reduction in A1c and markedly low hypoglycemia.” Among the firsts Omnipod 5 offers is it’s the “first pod-based AID system, the first fully compatible phone-controlled AID system, the first system that no one has to plug in to access data, and the first AID system with a predictive algorithm.”

Its smart bolus calculator is not only able to directly incorporate blood glucose levels, but also blood glucose trends.

So far, as of the end of the third quarter of 2022, the company has been able to secure coverage in the U.S. for over 80 percent for covered lives for Omnipod 5, exceeding company expectations. Consequently, the company expects Omnipod 5 to increase its contribution to the performance of the company as its growth accelerates and it continues to gain market share. Increasing coverage will also play a factor in overall sales increases going forward.

This is not only generating sales from new customers, but also from existing Omnipod users that are converting to Omnipod 5. The company also sees conversions from patients using tubed pump technologies.

In the first two months of its full market release Omnipod 5 accounted for over 80 percent of new customer starts in the U.S., compared to 25 percent in the second quarter of 2022.

Conclusion

While Omnipod 5 is definitely a gamechanger on the revenue side, it still represents a challenge on the earnings side because of its accelerated adoption and higher manufacturing and sales costs in the U.S.

Even though the results from the latest earnings report were positive, with revenue beating by $29.58 million and earnings per share of $0.45 beating by $0.31, that was non-GAAP numbers.

When using GAAP, the company had a net loss of $(5.2) million or $(0.08) per share in the third quarter of 2022, and a net loss of $(12.4) million or $(0.18) per share in the first nine months of 2022. It looks like it’s going to struggle in that area over the next couple of years from higher marketing and U.S. manufacturing costs.

So, while I expect revenue to continue to climb, margin and earnings will probably remain under pressure.

With the company’s share price up over $100 per share since May 2022, it looks to me like much of what is visible has already been priced in and is probably due for a correction. The last time it corrected it plunged almost $70.00 per share before starting to rebound. It wouldn’t surprise me to see that again as we enter a potentially weak macro-economic environment in 2023.

For those considering taking a position in PODD, I would wait for a correction before looking for an entry point that provides better risk/reward.