Insulet Corporation — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Insulet develops and sells the Omnipod insulin-delivery system and also earns revenue from drug-delivery products. Omnipod DASH began full U.S. market release at the end of Q1 2019.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $192.1 million | $151.1 million | $528.8 million | $398.9 million |
| Gross profit / margin | $123.1 million / 64.1% | $102.0 million / 67.5% | $346.2 million / 65.5% | $259.9 million / 65.1% |
| Operating income | $17.0 million | $6.9 million | $31.9 million | $11.2 million |
| Net income (loss) | $0.9 million | $1.7 million | $6.6 million | $(6.6) million |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $51.5 million | $5.5 million |
- Q3 revenue grew 27%; diabetes revenue increased 34%, while drug-delivery revenue fell 21% to $14.9 million. U.S. and international Omnipod revenue grew 34% and 35%, respectively.
- Nine-month revenue grew 33%. International Omnipod revenue rose 60%, partly reflecting the move to direct European sales; U.S. Omnipod revenue rose 28%. Drug-delivery revenue declined 7%.
- Q3 gross margin declined 340 basis points year over year, principally because of start-up costs and inefficiencies at the new U.S. manufacturing facility. Nine-month gross margin increased 40 basis points.
- Q3 net income included a $6.5 million debt-extinguishment loss. Nine-month other income included a $1.8 million insurance settlement.
Financial position, cash flow and financing
- At September 30, cash and cash equivalents were $419.9 million; short- and long-term investments totaled $216.6 million. Current assets were $793.9 million and current liabilities $113.3 million.
- Convertible debt was $985.8 million net on the balance sheet; principal outstanding totaled $1.322 billion. Estimated fair value of the debt was $1.662 billion.
- In September, Insulet issued $800 million of 0.375% convertible notes due 2026, receiving $780.2 million net. Proceeds funded a partial repurchase of 1.25% notes and $85.4 million of capped calls. The capped calls are intended to reduce potential share dilution, subject to their terms.
- During Q3, the company repurchased $225 million principal of 1.25% notes for $648 million total consideration, including cash and shares. In October, it repurchased the remaining $120 million principal for $315 million consideration; the filing expects a $3.1 million extinguishment loss in Q4.
- Nine-month operating cash flow was $51.5 million; capital expenditures were $114.6 million. Financing activities provided $275.9 million, and cash, cash equivalents and restricted cash increased $306.0 million.
- Management said available liquidity should cover projected operating, investing and debt-service requirements for at least 12 months. Capital commitments were $27.9 million at quarter end.
Outlook, commentary and risks
- Management expected strong 2019 Omnipod revenue growth, partly offset by lower drug-delivery revenue. It expected full-year gross margin to be relatively consistent with 2018, with manufacturing improvements and channel/pricing benefits offset by new-facility start-up costs.
- Management expected 2019 R&D, sales and marketing, G&A, interest expense and capital expenditures to increase versus 2018. The company planned continued DASH rollout, market-access expansion and production ramp-up. No specific revenue or earnings target was provided in this filing.
- The Acton, Massachusetts facility began production in Q2. Management expects it to reduce manufacturing costs, add capacity and redundancy, and support growth, but reported start-up costs and inefficiencies during the ramp.
- A Swiss arbitration concerns fees owed to a former European distributor. The estimated final aggregate fee ranges from $5 million to $55 million; $7.8 million had been recognized at September 30, and $5.1 million had been paid.
- Risks highlighted include reliance on Omnipod, manufacturing and supplier concentration, reimbursement and competitive pressures, international and foreign-exchange exposure, product/regulatory and cybersecurity risks, and the ability to service debt. Management reported no material change to previously disclosed risk factors and no material off-balance-sheet arrangements.
Most important facts for investors to verify
- Whether DASH adoption and U.S. and international Omnipod growth continue, and whether drug-delivery sales stabilize.
- Whether the Acton facility achieves planned efficiencies and capacity without further gross-margin pressure.
- The arbitration outcome and final former-distributor fee, given the wide $5 million–$55 million estimate.
- The remaining debt obligations, conversion-related dilution exposure, and cash requirements following the October 2019 note repurchase.
- Whether operating cash generation can support elevated capital spending and continued growth investment.