Insulet Corporation (NASDAQ: PODD) — Q2 2019 Form 10-Q
Unaudited results for the quarter and six months ended June 30, 2019, compared with the corresponding 2018 periods. Insulet develops and sells the Omnipod insulin-delivery system and provides drug-delivery products to pharmaceutical partners.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $177.1 million | $124.3 million | $336.7 million | $247.8 million |
| Gross profit / margin | $116.4 million / 65.7% | $82.1 million / 66.0% | $223.1 million / 66.3% | $157.9 million / 63.7% |
| Operating income | $7.6 million | $4.3 million | $14.9 million | $4.3 million |
| Net income (loss) | $1.4 million | ($1.7 million) | $5.8 million | ($8.3 million) |
| Diluted earnings (loss) per share | $0.02 | ($0.03) | $0.09 | ($0.14) |
| Operating cash flow | Not separately reported | Not separately reported | $20.3 million | ($10.4 million) |
- Q2 revenue increased 43%; diabetes revenue rose 51% to $160.8 million. U.S. Omnipod revenue grew 26% to $98.1 million, international Omnipod revenue increased 120% to $62.7 million, and drug-delivery revenue fell 8% to $16.3 million.
- For the first half, revenue grew 36%. U.S. and international Omnipod revenue increased 24% and 79%, respectively; drug-delivery revenue was approximately flat year over year.
- Q2 gross margin decreased 0.3 percentage points year over year, while first-half margin improved 2.6 points. Operating expenses increased 40% in Q2, led by R&D growth of 72%, sales and marketing growth of 30%, and G&A growth of 30%.
- At June 30, cash and cash equivalents were $119.9 million; short- and long-term investments totaled $252.6 million. Current assets were $498.8 million and current liabilities $105.8 million.
- Convertible notes had $747.5 million aggregate principal outstanding and a $607.4 million net carrying amount. The notes bear coupons of 1.25% and 1.375%, and mature in 2021 and 2024. The filing estimates their combined fair value at $1.206 billion.
- First-half investing cash outflow was $31.8 million, including $91.9 million of property and equipment purchases. Cash increased $6.0 million during the period. Operating cash flow less property and equipment purchases was approximately negative $71.7 million.
Changes and business developments
- Revenue growth reflected expanding Omnipod adoption and, internationally, the move to direct European commercial operations after the former distributor agreement expired in June 2018, including more favorable pricing.
- Insulet began a full U.S. market release of Omnipod DASH at the end of Q1 2019. It began producing product at its new highly automated Acton, Massachusetts facility during Q2; startup costs and inefficiencies weighed on quarterly gross margin.
- First-half operating cash flow improved from use of cash in 2018, reflecting the return to net income and favorable working capital. Investing cash outflow was substantially lower than in the prior-year period, which included greater net purchases of investments.
- At June 30, 2019, total assets were $977.7 million and stockholders’ equity was $249.8 million, versus $928.7 million and $212.1 million, respectively, at December 31, 2018. Adoption of lease accounting added right-of-use assets and lease liabilities to the balance sheet.
Outlook, risks and contingencies
- Management expected strong 2019 Omnipod revenue growth, partly offset by lower drug-delivery revenue, and expected full-year gross margin to be relatively level with 2018. It expected R&D, sales and marketing, and G&A expenses to increase year over year.
- Management cited continued DASH rollout, expansion in existing markets and payor access, and ramp-up of the Acton facility as priorities. It expected 2019 capital expenditures to be relatively consistent with 2018 and disclosed approximately $30 million of capital commitments. Management believed available liquidity would meet projected operating, investing and debt-service needs for at least 12 months.
- An arbitration in Switzerland concerns fees owed to a former European distributor. The estimated total fee range is $5 million to $55 million; $7.8 million had been recognized for qualifying sales through June 30, 2019, and $3.8 million had been paid by that date. The ultimate amount depends on the customers counted under the agreement.
- Two derivative actions related to allegations similar to a previously settled securities class action remained subject to court approval of settlement. The company said it expected the related plaintiffs’ counsel fees and expenses to be covered by insurance, and stated that other pending matters were not expected to be material.
- Key risks include dependence on Omnipod, product development and manufacturing execution, reimbursement and payor access, suppliers, international operations and foreign exchange, competition, regulation, product liability, and the ability to service convertible debt. The filing also notes concentration of substantially all manufacturing in China and substantially all inventory at one Massachusetts location.
Important facts for investors to verify
- Whether Omnipod and DASH adoption sustains growth, particularly in the U.S., and whether international growth continues after the transition to direct sales in Europe.
- Whether Acton facility ramp-up reduces unit costs and supports capacity without continued material startup inefficiencies.
- The final distributor arbitration amount and its cash-flow and earnings impact, given the wide $5 million–$55 million disclosed range.
- Cash generation relative to substantial capital spending, and the resources available for debt service and future investment.
- The potential dilution and refinancing implications of the convertible notes, including their conversion terms and market-value sensitivity.