Insulet Corporation — FY2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. The filing also reports quarterly results; Q4 ended December 31, 2011. Insulet develops and sells the OmniPod insulin-delivery system and, following its June 2011 acquisition of Neighborhood Diabetes, distributes additional diabetes supplies and pharmaceuticals.
Financial performance and liquidity
| Metric | FY2011 | FY2010 |
|---|---|---|
| Revenue | $152.3 million | $97.0 million |
| Gross profit | $66.7 million | $43.7 million |
| Gross margin | 43.8% | 45.1% |
| Operating loss | $(42.5) million | $(38.6) million |
| Net loss | $(57.2) million | $(61.2) million |
| Net loss per share | $(1.22) | $(1.54) |
| Cash used in operating activities | $(25.5) million | $(35.6) million |
- Revenue rose 57%, reflecting continued OmniPod adoption and $35.3 million of Neighborhood Diabetes revenue included from the acquisition date. Cost of revenue rose 61%; the acquired distribution business carries lower margins. OmniPod unit costs declined.
- Operating expenses increased 33% to $109.2 million, including higher R&D and selling costs and acquisition-related expenses. Gross profit did not cover operating expenses, so Insulet remained loss-making.
- Net loss improved by $4.0 million, principally as net interest expense declined to $14.6 million from $22.5 million. FY2010 included a $7.0 million non-cash charge related to extinguishing the former credit facility.
- At year-end, cash and cash equivalents were $94.0 million, working capital was $103.8 million, and total assets were $209.6 million. Cash declined $19.3 million during 2011. Cash used in investing activities was $49.0 million, including $37.9 million paid for Neighborhood Diabetes and approximately $9.0 million for manufacturing equipment.
- Convertible notes had $158.8 million aggregate principal outstanding: $15.0 million of 5.375% notes due June 2013 and $143.8 million of 3.75% notes due June 2016. Balance-sheet debt, net of discounts, was $108.5 million. The 2011 financing included issuing the 3.75% notes and repurchasing $70 million principal of the 5.375% notes for $85.1 million.
- Q4: Revenue was $47.2 million versus $27.8 million in Q4 2010; gross profit was $20.1 million versus $13.8 million; net loss was $14.3 million versus $20.9 million. Q4 net loss per share was $(0.30), compared with $(0.50).
Material changes, outlook and risks
- The June 2011 Neighborhood Diabetes acquisition expanded distribution, reimbursement and pharmacy capabilities. The $62.4 million purchase consideration comprised $37.9 million cash, $24.4 million in stock and contingent consideration. Reported FY2011 results include only seven months of its operations.
- Management expected revenue to continue increasing in 2012, citing Neighborhood Diabetes, new customers and international expansion. It expected continued near-term net losses. No specific revenue, earnings or cash-flow guidance was provided.
- Management planned to focus first on production and regulatory approval of the smaller, lighter next-generation OmniPod, then target a second-half 2012 launch. The device had CE Mark approval but was awaiting FDA 510(k) clearance. The filing stated existing manufacturing capacity was sufficient for expected 2012 demand.
- Management expected 2012 R&D spending to decrease slightly, while G&A and sales and marketing expenses were expected to rise, including from a full year of Neighborhood Diabetes costs and sales-force expansion.
- Management believed cash, together with expected product-sale proceeds, would meet projected operating and debt-service needs for at least the next 12 months. It estimated cash interest payments of $6.2 million in 2012 and repayment of $15 million principal in 2013; $143.8 million principal was due in 2016.
- Key risks include persistent losses and uncertain profitability; reliance on OmniPod adoption and third-party reimbursement; Medicare coding concerns; dependence on Flextronics’ China manufacturing operation and sole-source component suppliers; regulatory approval and product-quality risks; competitive pressure; and Neighborhood Diabetes’ exposure to Medicare rates, audits, payor relationships and competitive bidding.
- BD’s patent-infringement lawsuit remained pending; Insulet disputed the claims and reported no material financial exposure at year-end. The company also disclosed a prior Medtronic patent-license inquiry. The filing cautioned that litigation outcomes are uncertain.
- Healthcare reform included a 2.3% medical-device excise tax scheduled to begin in 2013. Insulet also identified potential dilution from convertible-note conversions and possible limitations on use of tax-loss carryforwards.
Most important facts for investors to verify
- How much of reported growth reflects underlying OmniPod demand versus the acquired business, and how the acquisition performs on a comparable, full-year basis.
- FDA clearance timing, production readiness, launch timing and unit-cost performance for the next-generation OmniPod.
- Cash burn, liquidity and ability to meet the 2013 and 2016 note maturities, particularly if losses persist or sales disappoint.
- Gross-margin trends as lower-margin distribution revenue grows, and whether OmniPod cost reductions can offset operating expenses.
- Reimbursement and collection trends, including Medicare coding, Neighborhood Diabetes exposure to CMS policy, and adequacy of the doubtful-account allowance.
- Developments in the BD litigation, supplier continuity and any material product-quality or regulatory issues.