Business context and reporting period
Insulet Corporation develops, manufactures and sells the Omnipod tubeless insulin-delivery system, alongside drug-delivery products, primarily Pods used in Amgen’s Neulasta Onpro kit. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2020; comparisons are with the corresponding 2019 periods.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $234.0 million | $192.1 million | $658.3 million | $528.8 million |
| Gross profit / margin | $151.8 million / 64.9% | $123.1 million / 64.1% | $421.2 million / 64.0% | $346.2 million / 65.5% |
| Operating income | $23.8 million | $17.0 million | $58.8 million | $31.9 million |
| Net income | $11.6 million | $0.8 million | $23.9 million | $6.6 million |
| Diluted earnings per share | $0.17 | $0.01 | $0.36 | $0.11 |
- Q3 revenue increased 21.8% reported and 19.9% at constant currency; nine-month revenue increased 24.5% reported and at constant currency. Growth was primarily driven by higher volume and, to a lesser extent, favorable sales-channel mix.
- Q3 revenue comprised U.S. Omnipod $132.3 million, international Omnipod $79.8 million and drug delivery $21.9 million. Nine-month amounts were $377.7 million, $226.1 million and $54.5 million, respectively.
- Q3 operating expenses included research and development of $38.8 million and selling, general and administrative costs of $89.2 million. For the nine months, those costs were $108.5 million and $253.9 million.
- Adjusted EBITDA, a non-GAAP measure, was $42.3 million for Q3 and $110.8 million for the nine months, versus $29.6 million and $71.9 million in 2019.
Cash flow, liquidity and debt
- For the nine months, operating cash flow was $85.0 million, compared with $51.5 million in 2019. Capital expenditures were $88.5 million; investing activities provided $65.3 million, mainly reflecting maturities and sales of investments. Financing activities provided $475.4 million.
- Cash and cash equivalents were $838.1 million and investments were $59.1 million at September 30, 2020. Current assets were $1,160.4 million and current liabilities were $175.2 million. Management said available liquidity was sufficient for projected operating, investing and debt-service needs for at least 12 months.
- Convertible debt had $1,202.5 million principal outstanding and a $921.5 million net carrying value. The notes comprise $402.5 million of 1.375% notes due 2024 and $800.0 million of 0.375% notes due 2026. Nine-month net interest expense was $32.6 million, including substantial non-cash discount accretion.
- The company raised $477.5 million net from a common-stock offering in the first nine months. In October and the fourth quarter, it entered into a $70 million mortgage loan and equipment financings of approximately $37 million and $23 million. These subsequent borrowings carry stated rates of approximately 5.2%, 4.5% and 5.4%, respectively.
Material changes versus prior comparable periods
- Revenue and operating income rose substantially in both the quarter and year to date; net income also increased. U.S. Omnipod growth was attributed to customer-base expansion and pharmacy-channel sales. International growth reflected higher volume, with Q3 also benefiting from currency.
- Gross margin rose 0.8 percentage point in Q3 but fell 1.5 percentage points for the nine months. The year-to-date decline reflected U.S. manufacturing start-up inefficiencies and $7.6 million of China-related pandemic costs, partly offset by improved average selling price and channel mix.
- Research and development spending increased, primarily for Omnipod 5. SG&A rose with added sales and customer-service staff and a pilot direct-to-consumer advertising campaign; reduced travel costs partly offset the increase.
- Net interest expense increased year to date, mainly because of non-cash interest on the 2019 convertible notes, lower interest income and less capitalized interest. The 2019 period also included a $6.4 million debt-extinguishment loss.
- Cash increased significantly, supported by the May 2020 stock offering. Shares outstanding were 65,871,736 at September 30, 2020, versus 62,685,492 at December 31, 2019.
Guidance, outlook, risks and unusual items
- Management expected strong 2020 Omnipod revenue growth from market penetration and volume, partly offset by fewer new customer starts due to COVID-19. It expected higher drug-delivery revenue based on increased demand for Neulasta Onpro. No specific full-year revenue growth figure was provided.
- Full-year 2020 gross margin was expected to be approximately 64%, including an estimated $9 million to $10 million of COVID-related costs, plus manufacturing start-up costs and inefficiencies. R&D and SG&A spending were expected to increase year over year; capital expenditures were expected to be lower than in 2019.
- Omnipod 5 development remained a priority, with launch expected in the first half of 2021. The first phase of its pivotal trial was completed in October 2020; enrollment of children ages two to six began in Q3. FDA clearance was received for a feasibility study in people with Type 2 diabetes.
- COVID-19 disrupted production at the China contract manufacturer during the first two months of 2020 and led to expedited shipping, manufacturing incentives and other costs. Production had returned to normal capacity by March. The pandemic could still affect customer starts, supply chains, clinical trials, regulatory timelines and employee productivity. Some planned market entries shifted to early 2021.
- Roche sued Insulet in June 2020 over an expired U.S. patent, seeking royalties and legal costs; the company said it could not reasonably estimate potential losses, which could be material. Insulet separately filed a UK patent claim against Roche. A former European distributor fee remains subject to arbitration; the estimated aggregate fee range is $5 million to $55 million. The company reported $2.7 million accrued at September 30 and $5.1 million paid by that date.
- Two customers together represented 21% of nine-month revenue; one customer represented 11% of Q3 revenue and 12% of period-end net receivables. This creates customer-concentration exposure.
Most important facts for investors to verify
- Whether Omnipod volume growth and pharmacy-channel mix persist, and how much growth depends on new customer starts and distributor inventory.
- Whether manufacturing scale-up achieves the expected margin improvement and whether pandemic-related costs or supply disruptions recur.
- Progress, trial results, regulatory timing and launch readiness for Omnipod 5, including the anticipated first-half 2021 launch.
- The final outcome and financial exposure from the Roche litigation and former-distributor arbitration.
- Effects of the equity issuance and convertible-note terms on dilution, interest expense and future debt service; also verify the impact of the subsequent $130 million of stated loan and equipment financings.