Insulet

Insulet posted second-quarter constant-currency revenue growth of 23% and an operating margin of 16%, down 330 basis points from the prior-year period, largely due to rising SG&A expense. Management trimmed its 2026 outlook on a softer expected second half, with weakness concentrated in the US.

Why it matters: The pullback in guidance is consistent with our view that Insulet faces an uphill battle over the next 18-24 months, and conditions could get tougher before they improve. Management is focused on adjusting commercial operations to improve utilization, and especially retention, among type 2 diabetes patients. We agree that this is an important lever, considering roughly 40% of new patient starts come from the type 2 segment. We're also wary of the upcoming competition from Tandem Diabetes and MiniMed as they launch their own tubeless patch pumps in the 2026-27 timeframe. This will be the first time Insulet will face such direct competition.

The bottom line: After dialing down our projections for 2026 and 2027, we're lowering our fair value estimate to $215 per share from $263. We now assume 18% revenue growth for the full year, which implies 9% growth in the second half. This puts us slightly below management's revised outlook. We also estimate top-line growth to slow further to 8% in 2027 as competitors gain traction with their pump trials. Shares fell 18% on the news but remain undervalued, in our view. We expect Insulet to stabilize and return to low double-digit growth in 2028 when the firm is anticipated to launch a new OmniPod that incorporates new features such as more robust automated insulin delivery algorithms and longer wear time.

Big picture: Despite competition on the horizon, we think Insulet's narrow moat remains intact, primarily due to intangible assets that have enabled a differentiated user experience with the Omnipod form factor. Available competitive information suggests that the user experience could still differ.

On the whole, we're impressed with management's detailed understanding of where the field force and end-user support have fallen short with the type 2 patient pool, and the new operational changes to help get and keep these patients on the Omnipod.

We've seen this kind of intensive direct-to-patient support work well for Coloplast and their end users of ostomy bag systems. Among ostomy system users, their bodies often change due to weight gain or loss related to their underlying gastrointestinal condition. And each time this occurs, the current ostomy system may not work as well as before. Coloplast's customer retention program intervenes at these inflection points to help troubleshoot and adjust the user's selection of Coloplast ostomy components for a better solution. At these critical points, Coloplast is good at keeping these end users in the Coloplast fold. We think a similar conceptual approach to offering direct patient support at critical junctures can help keep new type 2 patients on the Omnipod.

Though management has been close-mouthed about upcoming competition, we have to believe that Insulet's operational changes and salesforce compensation shift toward retention are part of a concerted effort to shore up its user base in advance of Tandem and Medtronic's tubeless patch pumps. If Insulet executes well and improves retention, this will help soften the competitive pressure.

We've lowered our fair value estimate to $215 per share, down from $263, after trimming our estimates for 2026 to account for the disruption from the latest voluntary recall, and for 2027 to reflect stronger competitive inroads by Tandem and MiniMed. Although management has lowered its full-year outlook for revenue growth to 21% to 23%, we've trimmed our projected 2026 revenue growth to 18%, down from 21%. This is followed by significant top-line growth deceleration to 8% in 2027, before a return to low double-digit growth in the 2028-2030 time frame. In other words, we expect Insulet to grow, but it will trail the high-teen growth we've seen from the tubeless patch pump market as competitors take share. While we still think the Omnipod’s user-friendly experience could be a positive factor in converting Type 2 patients to pump use, that project is likely to be more challenging now with the anticipated 2026-27 entry of direct competition from Tandem and MiniMed, which will feature seven-day wear (compared with Omnipod’s three-day wear). We expect Insulet to offer a longer-wear Omnipod in 2028. Additionally over the longer term, we anticipate Insulet will move toward better predictive algorithms and the automation of mealtime insulin management to defend its user base.

Since 2012, the firm has made continual progress in bringing down its manufacturing costs (by nearly 2,800 basis points) while increasing its top line. Insulet has also steadily chipped away at its operating costs since it launched its first Omnipod product. We estimate the operating margin will reach 18% by 2030 as the firm scales up and reaps operating leverage from its investments in sales and marketing.

We think Insulet has earned a narrow economic moat rating, which reflects our belief that the firm is more likely than not to deliver normalized excess returns over the next decade. We think its narrow moat stems from intangible assets, which include intellectual property, materials engineering expertise in the somewhat fickle shape-memory-alloy technology, as well as experience in manufacturing these complicated devices, and, increasingly over time, predictive algorithms for insulin delivery that improve as more users adopt Omnipod.

Disposable, tubeless patch pumps are trickier to manufacture than traditional tubed insulin pumps, partly because they have more components, creating more opportunities for things to go wrong. We saw some of these manufacturing quality issues surface in 2013-14, when Insulet launched its redesigned Omnipod, which was 30% smaller, and initiated new manufacturing lines at its China facility to meet increased demand for the product. Production problems resulted in greater levels of scrap, increased Omnipod failures for patients, disappointing gross margins, and ultimately, a management change.

Insulet currently holds nearly 900 patents in the US and other key markets, with another 700 applications pending that cover the product’s design, cannula insertion mechanism, software, and the shape-memory alloy drive system. It is this last element that we believe is most critical, as it’s an ingenious application of smart metal technology that expands and contracts to turn gears that drive the plunger and release insulin (versus any sort of motor-based mechanism). We believe this shape memory alloy system is partly what has made it difficult for competitors to create something similar, as this technology is known for some of its limitations (for example, low durability) that have kept it from more extensive commercial applications.

While we think intellectual property is helpful in keeping competitors from getting too close to the specifications of the Omnipod, we also recognize that, among medical technology products, innovation cycles are often short, and new products are commonly commercialized even before existing patents have run their course. For this reason, we think Insulet’s record of rolling out new and improved technology is a significant factor in its narrow moat. Since receiving US Food and Drug Administration approval in 2005, Insulet has launched three more generations of pumps that substantially improved wearability, reduced product size and cost, enabled smartphone control, and automated insulin delivery. Its next Omnipod 6 is expected to launch in 2027, followed by the next-gen Omnipod in the 2028-29 time frame.

The competitive landscape is likely to change once Tandem Diabetes and MiniMed—both well-established competitors in the Type 1 insulin pump market—enter the tubeless patch pump market in 2026 and 2027. For the first time, Insulet will need to fend off more direct competition from major companies. However, our research suggests that the Omnipod will still offer a simpler, more user-friendly experience than the upcoming competitive pumps from Tandem and MiniMed two-piece tubeless patch pumps that will feature a durable pump that can be attached to the body with an adhesive patch, and a disposable insulin reservoir. Based on the preliminary available information, we think the impending patch pumps from Tandem and MiniMed will still be more complex to use and require the patient to disconnect each time for bathing or swimming. We think the Omnipod user experience will still be distinctive.

Secondarily, we think there is a degree of patient loyalty to the Omnipod thanks to its tubeless, one-piece, disposable design. Omnipod is “stuck” directly on the body for three days at a time; the waterproof design means the patient can bathe or swim without any worry or disconnecting from the pump. The loyalty to Omnipod is all the more impressive because the pay-as-you-go model of buying from the pharmacy means Omnipod users could easily switch to competitive pumps because they aren’t locked into the four-year durable pump cycle determined by payers.

Though we see no structural evidence of switching costs for Omnipod users, annual attrition rates are typically in the 2%-5% range, suggesting a degree of loyalty to the Omnipod pump. In contrast, based on user surveys we estimate annual attrition among Tandem and MiniMed users ranges from 5% to 12%.

In terms of environmental, social, and governance matters, Sustainalytics rates Insulet as having medium-risk exposure, and we concur. The biggest risk revolves around the potential for product defects. While insulin pumps are not quite equivalent to life-saving devices such as pacemakers or heart valves, problems with product performance could lead to serious patient injury. Some of Insulet's products are approved through the 510(k) process, which offers less protection from legal liability than the premarket approval pathway. Insulet's heavy reliance on Omnipod means a recall would have a material effect on cash flow in the near term. However, we are less convinced that a defective product would necessarily impair the firm's narrow economic moat, as most defective devices can be addressed with new engineering or manufacturing solutions relatively quickly.

Rumblings that Medicare's competitive bidding program for durable medical equipment distributors will include insulin pumps could boost Insulet, as its pumps are distributed through the pharmacy channel.

Insulet created the first tubeless insulin pump on the US market and has a head start on the manufacturing learning curves related to this disposable one-piece unit.

With makers of continuous glucose monitors focused on converting the much larger Type 2 diabetes population, Insulet has benefited as some of these patients from this larger segment also opt to adopt an insulin pump.

With only one product and low switching costs for customers, Insulet is vulnerable if larger competitors produce similar or superior tubeless insulin pumps.

When consumers pull back on spending, we've seen some diabetic patients put off purchases of more discretionary devices such as insulin pumps when manual injections provide adequate blood glucose control.

Insulet's hybrid closed-loop algorithm is reputed to be inferior to those offered by competitors. Management has acknowledged the algorithm needs improvement.