At the start of the year, I called shares of Insulet Corporation (NASDAQ:PODD) an interesting, yet expensive, story. The maker of the Omnipod Insulin Management System provides essential services to a targeted patient group of more than 10 million diabetes patients and has five-folded the business over the past decade.
The company by now has steadily become profitable, as shown by Q4 earnings, which eliminates the need and expectation to see dilution, as continued growth of its method of addressing diabetes provides a runway for growth, although competitive threats (including G1P-inhibitors) loom. The risk-reward now is more favorable than it has been for a long time, but (earnings) expectations are still demanding.
Simplifying Lives Of Diabetes Patients
Diabetes is a very prevalent disease, with some half a billion people across the globe estimated to be diagnosed with it. More than 60 million patients require insulin, with Insulet focusing on a segment of the market (about 20%), which is split pretty evenly between patients diagnosed with type 1 and type 2 diabetes.
Omnipod is an accessible, wearable and discrete solution, in a marketplace in which injections are still the norm. The advantages of this form of treatment, as well as relatively small adoption in the marketplace, reveals the potential. The company subsequently has five-folded sales over the past-decade, meaning that a $20 stock in the early 2010s rose to levels above the $300 mark in 2023.
Shedding Perspective
For the year 2022, Omnipod generated $1.3 billion in sales on which it posted earnings of $1.30 per share, resulting in sky-high valuations with equity of the business valued at $21 billion, as that valuation even excluded a modest net debt position.
Margins were still relatively low as the company launched the Omnipod 5 System during 2022 (which by now makes up the majority of sales), at the time resulting in some additional costs, without any revenues to offset against. Originally guiding for 2023 sales to increase by 14-19%, revenue growth only accelerated while shares came down.
This made Insulet a weight-loss stock itself, as the market at large was scared of the potential of weight loss therapies, which if successful at large scale, could shrink the diabetes market, and actually be detrimental to the growth outlook for a company like Insulet.
In fact, shares fell from highs around $330 early in 2023 to $125 in the fall, having recovered to the $200 mark as the company started the year 2024. This came as the company continued its trajectory of solid growth, with 2023 sales at the time seen up 26-27%, to be accompanied by real operating margins equal to 9-10% of sales.
Moreover, management claimed that the overhang of GLP-1s class of drugs on the diabetes market are overblown, with type 1 diabetes being an autoimmune disease, while inhibitors only having the potential to delay the process in type 2 diabetes, still requiring insulin.
With sales seen at $1.65 billion in 2023, a $14 billion equity valuation at $200 per share looked more reasonable already, yet at 9 times sales and 100 times realistic earnings, Insulet Corporation valuations were still demanding.
Expectations Come Down Further
Since the start of the year, share of Insulet have fallen nearly 20% to $165 per share here, despite a raging bull market in equity markets at large.
In February, Insulet reported blowout fourth quarter results for 2023, with quarterly revenues of $510 million being up 38% on a year-over-year basis. Even if we factor in an estimated $20-$25 million accelerated wholesale order, sales were very strong, driven by a rapid adoption of the Omnipod 5. The company furthermore benefited from a return of inventory levels at distributors, adding another $10-$15 million in sales, but even if this is stripped out, growth was solid.
These results were accompanied by very strong GAAP operating profits of $106 million. For the year, revenues came in at $1.70 billion, as operating profits of $220 million worked down to earnings a couple cents shy of $3 per share.
For 2024, the company guided for total Omnipod revenues to rise by 13-18%, driven by the growth in the U.S. Outside this, the company has a tiny drug delivery business, responsible for about 2% of sales, whose results are not meaningful in the grand scheme of things.
First quarter Omnipod sales are seen up 15-18% despite the accelerated order “borrowing” sales, which looks strong, but also shows that growth might slow down during the year. Full year operating margins are seen at 13%, basically at par with 2023, although the company sees headwinds from the timing of the accelerated orders and added inventory levels. Adjusted for these impacts, operating margins are seen up 2 points in 2024 to about 14% of sales.
All this suggests that sales are seen around $1.95 billion and operating profits around $250 million, creating a roadmap for earnings per share between $3.00 and $3.50 per share. Net debt has come down a bit to $711 million and amidst a $329 million adjusted EBITDA number, leverage ratios come in at the lower 2s.
With 73 million shares (on a diluted basis) trading at $165, the market value has fallen to $12 billion, reducing the sales multiple to around 6 times sales here.
And Now?
Trading at $165 and with earnings power seen at $3.00-$3.50 per share, Insulet Corporation multiples have come down a long way to still a hefty 50 times earnings multiple. That said, the company started 2023 on a very soft note, and while mid-teens growth for 2024 marks a big declaration of growth, it comes amidst strong performance in 2023 (creating tough comparables) as this is still a solid pace of growth.
Moreover, Insulet now has the evidence on its side with the Omnipod 5 system resulting in superior outcomes to pump therapy, including a >17% improvement in time in range, as well as other benefits, needed to grow the current user base of 425,000 active users. While these results look strong, the study does not focus on other solutions developed by competitors.
These results are necessary as the company needs some growth, with the full year guidance calling for sales growth sub 20%. That would be the first time in 9 years’ time in which sales growth would come in below that percentage number.
This slower growth makes investors fearful given the G1P discussions, but also the competition from traditional players, like Medtronic (MDT) and Tandem Diabetes Care (TNDM), although the company claims that the Omnipod 5 is the only FDA cleared and fully disposable AID system.
Amidst all this, my optimism about Insulet Corporation keeps growing, as shares keep lagging. The company ended 2023 on a very strong note, and while the 2024 outlook is a bit softer, continued improvements are seen. Given this discussion, I am getting more attracted to the shares, looking to initiate small on dips below the $150 mark here.
