Insulet Corporation — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016. Financial statements are unaudited. Insulet develops, manufactures and sells the OmniPod insulin-management system and also provides drug-delivery devices using its technology platform.
Financial performance
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Revenue | $81.2 million | $48.1 million |
| Gross profit / gross margin | $44.1 million / 54.2% | $29.2 million / 60.6% |
| Operating loss | $7.7 million | $7.3 million |
| Net loss | $12.5 million | $11.8 million |
| Cash used in operating activities | $10.5 million | $3.5 million |
- Continuing-operations revenue increased 69% year over year. U.S. OmniPod revenue was $50.7 million, international OmniPod revenue $15.4 million, and drug-delivery revenue $15.1 million.
- Cost of revenue rose 96%, faster than revenue. Management attributed the gross-margin decline to costs associated with higher volumes, product mix—particularly greater international sales—and $1.9 million of costs indirectly related to a voluntary field safety notification initiated in November 2015. Increased quality investment also contributed to a $0.6 million year-over-year increase in warranty expense.
- Research and development expense rose 58% to $13.0 million; sales and marketing rose 63% to $24.0 million. The company remained loss-making, with net loss including $1.8 million from discontinued operations.
- Cash and cash equivalents were $111.6 million at March 31, down from $122.7 million at December 31, 2015. Operating cash outflow increased, primarily reflecting investment to support growth. Investing cash flow was positive $1.5 million, including $4.6 million in net proceeds from the business divestiture.
- Long-term debt, net of discount and financing costs, was $173.7 million; the related 2% convertible notes have $201.3 million principal and mature June 15, 2019. Current capital-lease obligations were $4.4 million; the leases carry effective rates of 13%–17%. Total current liabilities were $49.8 million and current assets $171.8 million.
Material changes and unusual items
- Revenue growth reflected higher U.S. OmniPod sales, international distribution sales and demand for the drug-delivery device. Management noted that Q1 2015 distributor ordering patterns had been unfavorable, making the comparison particularly strong in international markets.
- Insulet sold Neighborhood Diabetes to Liberty Medical in February 2016 for approximately $5 million, subject to customary closing adjustments expected to be finalized by June 30, 2016. The business is presented as discontinued operations. Q1 included a $1.3 million loss on sale; total discontinued-operations net loss was $1.8 million.
- Following the sale, Insulet entered into a distribution agreement with the buyer and a transitional-services arrangement lasting up to six months. The company reported $0.4 million of post-divestiture OmniPod sales to the buyer during the quarter.
- Operating cash use and investment spending increased alongside the company’s growth initiatives. Dilution also continued: common shares outstanding were 57.1 million at March 31, versus 57.0 million weighted-average shares for the quarter.
Outlook, risks and contingencies
- Management expected strong 2016 continuing-operations revenue growth across product lines and approximately 20% growth in the worldwide OmniPod installed base. It expected drug-delivery revenue to account for a larger share of growth.
- Management expected gross margin to improve during 2016 through manufacturing-efficiency improvements, while research and development, sales and marketing, and general and administrative expenses were expected to increase. It anticipated continued net losses in the near term.
- Management stated that cash, cash equivalents and expected cash generated from sales should cover projected operating and debt-service requirements for at least the next 12 months.
- Key disclosed risks include dependence on OmniPod and a single-source Pod supplier, manufacturing and inventory concentration, reimbursement and payor exposure, competition, product quality and regulatory matters, international and currency risks, and the ability to fund operations and service debt.
- The company retained a $0.9 million accrual for two Medicaid audit matters involving Neighborhood Diabetes. In April 2016, it settled a Massachusetts sales-and-use-tax audit for $0.5 million, reducing a previously recorded liability by $0.2 million and crediting general and administrative expense in Q1. A shareholder securities lawsuit remained pending; the company said it could not reasonably estimate a possible loss or range.
- The company reported no material changes to risk factors from its 2015 Form 10-K, no off-balance-sheet financing arrangements, and effective disclosure controls as of March 31, 2016.
Important facts for investors to verify
- Whether revenue growth and the stated installed-base outlook are sustained, and how much growth comes from international distribution and drug delivery.
- Whether manufacturing improvements can restore gross margin after the Q1 decline, and whether field-notification or warranty-related costs recur.
- The pace of cash use relative to management’s 12-month liquidity assessment, including operating and capital spending needs.
- The terms and potential dilution associated with the $201.3 million convertible notes, alongside the company’s ability to meet debt and lease obligations.
- Final Neighborhood Diabetes sale adjustments, the Medicaid audit outcomes, and developments in the pending shareholder lawsuit.