Insulet Corporation — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; comparisons are with Q1 2014 unless noted. Insulet develops, manufactures and sells the OmniPod insulin-delivery system and other diabetes products.
Financial performance and position
| Metric | Q1 2015 | Q1 2014 / comparison |
|---|---|---|
| Revenue | $61.2 million | $69.2 million; down 11% |
| Gross profit / margin | $32.8 million / 53.6% | $32.8 million / 47.4% |
| Operating expenses | $41.4 million | $34.7 million; up 19% |
| Operating loss | $8.6 million | $1.9 million |
| Net loss / diluted loss per share | $11.8 million / $0.21 | $6.1 million / $0.11 |
| Cash used in operating activities | $3.5 million | $1.0 million |
Cash and cash equivalents were $145.6 million at March 31, 2015, down $5.6 million from year-end 2014. Current assets were $205.4 million and current liabilities $47.4 million. Capital expenditures were $4.3 million; financing activities provided $2.2 million, including proceeds from employee stock-option exercises.
Long-term debt was $170.6 million net of discount, representing $201.3 million principal of 2% convertible notes due June 2019. Capital lease obligations were $10.0 million, including $6.0 million current. The company reported an accumulated deficit of $589.9 million.
Changes and management commentary
- Revenue fell $7.9 million, primarily because international revenue declined; other drug-delivery revenue increased. International sales were 7% of revenue, versus 19% in Q1 2014.
- Cost of revenue fell 22%, reflecting lower sales volume and lower OmniPod unit costs from manufacturing efficiencies. Gross profit was essentially unchanged, lifting gross margin by about 6.2 percentage points.
- Research and development rose 21%, general and administrative rose 11%, and sales and marketing rose 27%, primarily from added personnel and development or marketing activity. The increased spending contributed to a larger operating and net loss.
- Interest and other expense, net decreased to $3.2 million from $4.2 million, primarily reflecting the 2% notes replacing higher-rate debt.
Outlook, risks and contingencies
- Management expects 2015 revenue to increase as the company adds U.S. customers, expands internationally and grows sales with drug-delivery partners. It expects gross margin to improve with product mix and continued unit-cost reductions.
- Management expects higher 2015 R&D and sales and marketing spending, and a slight increase in general and administrative expense. It expects near-term net losses while investing in growth; no specific numerical earnings or revenue guidance was provided.
- Management stated cash, together with expected cash from product sales, should cover projected operating and debt-service requirements for at least the next 12 months. This is a forward-looking assessment, not a guarantee.
- Key risks include reliance on the OmniPod and a single-source OmniPod supplier, reimbursement and payor changes, manufacturing costs and capacity, competition, regulatory and product-liability matters, and the ability to service debt. The company identified concentration of operations in China and inventory in Massachusetts.
- Insulet paid approximately $1.5 million in Q1 to settle a Massachusetts Attorney General matter concerning Neighborhood Diabetes prescription-refill practices. A preliminary CMS/New York Medicaid audit letter received in April alleged overpayments; the company could not estimate the outcome or possible loss. It also continued to appeal a Massachusetts sales-and-use-tax assessment and had recorded a related liability.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting. The filing reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether revenue weakness, particularly international sales, reverses and whether planned growth translates into sustainable operating improvement.
- Whether lower OmniPod manufacturing costs and improved gross margin persist as volumes and product mix change.
- The outcome and potential financial exposure of the Medicaid audit and Massachusetts tax assessment.
- Cash burn, capital and lease commitments, and the company’s ability to meet debt-service needs as the $201.3 million convertible notes approach their 2019 maturity.
- Supplier continuity and reimbursement coverage, including the effects of reliance on Flextronics and third-party payors.