Insulet Corporation — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. Amounts below are in U.S. dollars; financial statement figures are unaudited. Insulet develops and sells the Omnipod insulin delivery system, alongside drug-delivery products. In July 2018, it took over direct commercial activities in Europe from its former distributor.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $151.1m | $121.8m | $398.9m | $333.2m |
| Gross profit / margin | $102.0m / 67.5% | $73.6m / 60.5% | $259.9m / 65.1% | $197.7m / 59.3% |
| Operating income (loss) | $6.9m | $2.0m | $11.2m | $(6.6)m |
| Net income (loss) | $1.7m | $(2.2)m | $(6.6)m | $(20.0)m |
| Operating cash flow | Not stated for the quarter | $5.5m | $19.4m |
- Revenue mix, Q3: U.S. Omnipod $82.0m, up 17%; international Omnipod $50.2m, up 55%; drug delivery $18.9m, down 2%. Nine-month revenue rose 20%, led by U.S. and international Omnipod growth; drug-delivery revenue declined 5%.
- Costs and margins: Gross margin improved 7.0 percentage points in Q3 and 5.8 points year to date. Management attributed improvement to direct European sales and supply-chain gains. Q3 operating expenses rose 33%; general and administrative expense increased 69% to $38.4m.
- Liquidity and investment: At September 30, cash and cash equivalents were $126.6m and marketable investments were $308.8m. Current assets were $445.7m versus current liabilities of $97.2m. The company reported $5.5m operating cash flow for nine months, while investing activities used $143.7m, including $127.6m of purchases of property, equipment and intangible assets. Cash and cash equivalents declined $146.0m from year-end.
- Debt: Convertible notes had $747.5m principal outstanding; carrying value, net of discount and issuance costs, was $584.5m. Notes carry 1.25% and 1.375% coupons and mature in 2021 and 2024. Nine-month interest expense was $22.1m.
Changes, outlook and notable items
- Growth in international Omnipod revenue and gross margin reflects the July transition to direct European sales, which also increased sales and marketing costs. The change in distribution model is a key driver of both growth and expenses.
- Insulet adopted ASC 606 in 2018; 2017 comparatives remain under the prior revenue standard. The new accounting changes timing of drug-delivery revenue and treatment of sales commissions. For the nine months, revenue would have been $392.2m and net loss $16.2m under the prior standard, versus reported revenue of $398.9m and net loss of $6.6m. Thus reported comparisons are not fully like-for-like.
- Management expects strong 2018 revenue growth, with international growth and expanded U.S. access partly offset by lower drug-delivery revenue. It expects gross margin to improve versus 2017 and higher R&D, sales and marketing, and G&A expenses. No specific full-year revenue or earnings target is provided. Management expects near-term losses may continue while it invests.
- The Acton, Massachusetts automated manufacturing facility was under construction, with production planned to begin in 2019. Capital expenditures for the facility and related equipment were expected to approach $200m by production start; approximately $168.3m had been invested by September 30. Management said available liquidity should cover projected operating, investing and debt-service needs for at least 12 months.
- Omnipod DASH received FDA clearance in June 2018; a limited U.S. commercial release began in Q3, ahead of a planned full launch in early 2019. Medicare Part D coverage work may expand access; the company estimated coverage eligibility could extend to about 450,000 additional people with Type 1 diabetes.
- CEO Patrick Sullivan was to retire effective January 1, 2019, with Shacey Petrovic succeeding him. Q3 G&A included $8.2m of accelerated stock-based compensation and $4.4m of accrued cash severance related to the transition.
- Following the European distributor agreement’s expiration, the company estimates fees payable to that former distributor could total $10m–$55m over the 12 months through June 2019. Approximately $2m was accrued for qualifying Q3 sales; the amount depends on disputed eligibility terms and sales volume.
- The securities class action settlement received final court approval in August 2018; related derivative-action settlement remained subject to court approval. The company stated it did not expect other pending matters to have a material outcome. Brexit-related trade, regulatory and operating uncertainty was identified as a risk.
Key investor verification points
- Track European direct-sales growth, associated costs, customer transition and the final distributor-fee calculation.
- Assess whether Omnipod growth and gross-margin improvements persist as the DASH launch and Acton facility ramp proceed.
- Monitor operating cash generation, working-capital needs and remaining facility spending against available liquidity and debt obligations.
- Separate underlying performance from ASC 606 timing effects, CEO-transition charges and non-cash convertible-debt interest.
- Review the outcome of the derivative-action settlement approval and any material developments in Brexit-related risks.