Insulet Corporation — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with Q1 2018 unless otherwise noted. Insulet develops and sells the Omnipod insulin-delivery system and also supplies drug-delivery devices, principally for Amgen’s Neulasta Onpro kit.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $159.6 million | $123.6 million | +29% |
| Gross profit / margin | $106.7 million / 66.9% | $75.8 million / 61.4% | Margin +550 basis points |
| Operating expenses | $99.4 million | $75.8 million | +31% |
| Operating income | $7.3 million | $0 | Improved |
| Net income (loss) | $4.4 million | ($6.6 million) | Improved by $10.9 million |
| Operating cash flow | $6.4 million | ($4.3 million) | Improved |
- U.S. Omnipod revenue was $86.1 million, up 23%; international Omnipod revenue was $56.9 million, up 48%; drug-delivery revenue was $16.6 million, up 11%.
- Gross-margin improvement reflected favorable European pricing after the shift to direct commercial operations and manufacturing and supply-chain improvements.
- Research and development rose 58% to $32.0 million, sales and marketing rose 26% to $41.6 million, and general and administrative expense rose 15% to $25.9 million.
- Cash and cash equivalents were $129.3 million; short- and long-term marketable investments totaled $263.9 million. Current assets were $496.4 million and current liabilities were $114.0 million.
- Convertible notes had $747.5 million principal outstanding and a $599.6 million net carrying value. The notes mature in 2021 and 2024. Q1 interest expense was $6.6 million, net of $3.5 million capitalized interest.
- Capital expenditures for property, equipment and intangible assets were $45.3 million in Q1. Cash and cash equivalents increased $15.3 million during the quarter.
Material changes and business developments
- Total revenue increased $36.0 million, led by growth in both U.S. and international Omnipod sales. Management attributed international growth in part to direct European sales and more favorable pricing, and U.S. growth to customer-base expansion and broader access.
- Gross margin rose from 61.4% to 66.9%. Operating income was $7.3 million, compared with break-even in Q1 2018; the company reported net income versus a prior-year loss.
- Operating cash flow turned positive, primarily due to net income and favorable working capital. Investing cash flow was positive $7.6 million versus negative $56.0 million a year earlier, mainly reflecting lower net purchases of marketable securities, partially offset by higher capital expenditures.
- Insulet began the U.S. full market release of Omnipod DASH at the end of Q1. Production at its new Acton, Massachusetts manufacturing facility was planned to begin in Q2 2019; cumulative investment in the facility and related equipment was approximately $233 million through March 31.
Outlook, risks and unusual items
- Management expected strong 2019 revenue growth from global Omnipod expansion, partially offset by lower drug-delivery revenue. No numerical full-year revenue guidance was provided in the filing.
- Management expected 2019 gross margins to be relatively consistent with 2018: operating improvements and the full-year impact of European direct operations were expected to be offset by start-up costs and inefficiencies at the new U.S. manufacturing operation.
- Management expected higher 2019 research and development, sales and marketing, and general and administrative expenses, as investment continues in product development, commercial support, and business infrastructure. Capital expenditures were expected to be relatively consistent with 2018.
- The final fee payable to the former European distributor for qualifying Omnipod sales from July 2018 through June 2019 was estimated at $10 million to $55 million. The calculation methodology was subject to arbitration in Switzerland; $6.4 million had been recognized through March 31, 2019.
- Q1 interest expense and other, net decreased partly because more interest was capitalized for the manufacturing facility and because of a $1.8 million insurance recovery for damaged inventory in excess of its cost.
- Management said current liquidity was expected to cover projected operating, investing and debt-service needs for at least 12 months. It also cited execution risks around facility start-up, continued growth, payer access, international operations, and foreign-exchange exposure as overseas business expands.
- A shareholder derivative-action settlement remained subject to court approval; the company expected related plaintiffs’ counsel fees and expenses to be covered by insurance. Management stated that other pending legal matters were not expected to have a material outcome. No material change in reported risk factors was noted.
Important facts for investors to verify
- Whether Omnipod DASH adoption, payer coverage expansion, and U.S. and international customer growth sustain the reported revenue trajectory.
- Whether European direct-sales pricing and manufacturing improvements persist, and whether new-facility ramp costs limit gross-margin gains as management expected.
- The final distributor fee after arbitration, including the outcome of the customer-count methodology dispute.
- Actual 2019 capital spending and production ramp progress at the Acton facility compared with management’s plans.
- Convertible-note dilution and refinancing or settlement implications: the filing reports $747.5 million principal outstanding and notes’ estimated fair value of approximately $1.045 billion at March 31, 2019.
- Operating cash generation and liquidity as investment in capacity and commercial expansion continues.